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Rolls-Royce Holdings plc   -  RR.   

2019 Full Year Results

Released 07:00 28-Feb-2020

RNS Number : 4263E
Rolls-Royce Holdings plc
28 February 2020
 

                                                                                                                                           28 February 2020

 

ROLLS-ROYCE HOLDINGS PLC - 2019 Full Year Results

 

Strong 2019 underlying operating profit driving FCF; reinforcing our confidence for 2020

 

Warren East, Chief Executive commented: "After a challenging first half, we had a good end to 2019, delivering 25% growth in full year underlying operating profit and an encouraging level of free cash flow. Our restructuring efforts gained momentum, with run-rate cost savings of £269m. Civil Aerospace improved its underlying profit significantly, with record engine deliveries, good aftermarket performance and improved OE unit losses. We made further progress on the Trent 1000; cash costs are in line with guidance. We remain on target to reduce aircraft on ground to single digits by the end of Q2 2020.

 

We continued to invest significantly in R&D and took important steps towards becoming a leader in low carbon technologies. We grew our electrical capabilities with the acquisitions of Siemens' eAircraft business and a majority stake in Qinous, as well as developing new in-house hybrid-electric solutions."

 

 

·        Good end to 2019: strong Civil Aerospace aftermarket; better Power Systems trading in Q4

·        Underlying core operating profit up 25% to £810m; reported group operating loss £(852)m

·        Core FCF £911m led by higher profit and reflecting £173m Trent 1000 insurance receipts

·        £0.5bn improvement in net cash* position to £1.4bn; gross debt reduced by £1.1bn

·        Trent 1000 in-service cash costs £578m; £1.4bn exceptional charge in 2019 results

·        Trent 1000 guidance unchanged from November trading update

·        Record widebody engine deliveries; 14% lower OE unit loss; 64% share of new orders

·        Defence: record £5.3bn order intake driving 26% order book growth and healthy cash flow

·        Power Systems: revenue up 4% & operating margin +90bps despite market challenges

·        2020: underlying operating profit up ~15%; at least £1bn FCF; excl. any material COVID-19 impact

·        Remain confident in mid-term target of at least £1 per share of FCF (>£1.9bn FCF)

 

 

Underlying Group1

Underlying Core1,2

Year to 31 December

2019

2018

Organic

Change4

2019

20183

Organic

Change4

Revenue (£m)

15,450

15,067

+7%

15,261

14,286

+6%

Operating profit (£m)

808

616

+25%

810

631

+25%

Earnings per share

15.9p**

16.0p

-2.2p

15.9p

17.3p

-2.4p

Free cash flow (£m)5

873

568

305

911

648

263

 

Reported Group

 

 

2019

2018

Change

 

Revenue (£m)

16,587

15,729

+5%

 

Operating (loss) (£m)

(852)

(1,161)

27%

 

Earnings per share

(69.1)p

(129.1)p

60.0p

 

Net Cash  (£m)

1,361

840

+521

 

Payment per share

11.7p

11.7p

n/a

 

                 

*Net cash is presented excluding lease liabilities **2019 underlying EPS ~18p before the impact of IFRS 16

Footnotes to the tables can be found with the Financial Highlights

 

2019 Full Year Group Highlights

Financial:

·        Both Group and core underlying operating profit increased 25% to £808m and £810m respectively; led by a £195m organic improvement in Civil Aerospace underlying operating profit to £44m and underlying profit growth in Power Systems of 15% following better Q4 trading

·        Strong Group free cash flow (FCF) of £873m (2018: £568m) and core FCF £911m (2018: £648m), driven by improved underlying operating profit and Civil aftermarket cash margin; £578m Trent 1000 in-service cash costs partly offset by £173m insurance receipt

·        FCF before working capital movement (inventory, receivables & payables), insurance receipts and Trent 1000 costs was £747m, 79% higher than the prior year (2018: £418m)

·        Trent 1000 exceptional programme charge of £1,361m consistent with our November trading statement, driving reported operating loss of £(852)m (2018: £(1,161)m)

·        Core R&D cash spend increased modestly to £1,108m; good progress on electrical strategy including acquisition of Siemens' eAircraft business and strengthening of hybrid capabilities in Power Systems; small modular reactor (SMR) development progressing following UK Government matched funding; investment in future opportunities in Defence (Tempest, Future Vertical Lift, B-52)

·        Net cash excluding lease liabilities improved to £1,361m (2018: £840m); gross debt £1.1bn lower

Operational:

·        Civil Aerospace: record 510 widebody engines delivered; further progress in reducing average widebody OE loss, down 14% to £1.2m; 6% growth in large engine installed fleet to 5,029 with engine flying hour growth of 7%. Widebody market share of 64% achieved on new orders in 2019

·        Power Systems: revenues up 4%; strong power generation growth and market share gains in Asia; increased services penetration; underlying operating profit margin up 90bps to 10.1%

·        Defence: excellent performance in 2019 on both orders and cash flow; record order intake of £5.3bn and book-to-bill ratio of 1.6x driving healthy cash flow; 499 aero engines delivered

·        ITP Aero: good underlying revenue growth of 21% and strong profit growth to £111m

·        Restructuring plan on track; 2,900 cumulative headcount reduction with run rate cost savings of £269m achieved since the programme commenced in June 2018

Civil Aerospace in-service performance:

·        Trent XWB now our second largest installed fleet; leading engines now in their fifth year in service. Fleet leader has flown over 22,000 hours without a shop visit; Trent XWB-84 OE deficit reduced by over 20% in 2019 and remains on track to reach breakeven by the end of 2020

·        Trent 1000: roll-out of technical fixes progressing well, further actions underway to reduce customer disruption; in-service cash costs unchanged at £2.4bn across 2017-23. AOG reduction to single-digit by end of Q2 2020, unchanged since November update

·        Design progressing on track for the improved Trent 1000 TEN high pressure turbine (HPT) blade, the last major issue to resolve; certification of this component still expected in the first half of 2021

Market environment: mid-term ambition of £1 FCF per share remains supported

·        Updated widebody engine delivery expectations of 450 in 2020 and 400-450 per year over the mid-term, following previously announced airframer build rate reductions

·        Despite challenges in certain Power Systems end markets, growth expected to continue led by mission-critical power generation, rising services penetration and further geographical expansion

·        Defence targeting a number of attractive mid-term growth opportunities, particularly in the US where we are well positioned

·        The outbreak of COVID-19 represents a macro risk and is likely to have an impact on air traffic growth in the near term; however long term growth trends remain intact  

 

2019 Full Year Results: Financial Highlights

 

Percentage or absolute change figures in this document are on an organic basis4 unless otherwise stated.

 

 

Underlying revenue (£m)1

Organic

Change3,4

Underlying op. profit (£m)1

Organic

 Change3,4

Civil Aerospace

8,107

+10%

44

 +195

Power Systems

3,545

+4%

357

+15%

Defence

3,250

+1%

415

-7%

ITP Aero

936

+21%

111

+67%

Corporate / eliminations

(577)

-

(117)

-

Core2 operating business

15,261

+6%

810

+25%

Non-core2 business

189

-

(2)

-

Total Group

15,450

+7%

808

+25%

 

 

 

 

 

 

 

Civil Aerospace metrics:

 

 

2019

 

2018

Core underlying:

£m

 

2019

 

2018

Widebody engine deliveries

510

469

Net R&D cash spend

1,108

1,105

Average loss per widebody OE (£m)

1.2

1.4

R&D capitalised

468

498

Large engine in-service fleet

5,029

4,757

R&D P&L charge

688

650

Large engine invoiced flying hours

15.3m

14.3m

C&A

938

977

Large engine LTSA major refurbs

306

286

Hedge book $/£ average

1.53

1.54

Large engine LTSA check & repair

660

569

Hedge book (US$bn)

$37

$37

                   

 

1 Underlying: for definition see Note 2

2 Core includes Civil Aerospace, Power Systems, Defence and ITP Aero. Non-core includes Commercial Marine sold on 1 April 2019, Rolls-Royce Power Development sold on 15 April 2019, Civil Nuclear North America Service business and other smaller non-core businesses.

3 The prior period has been restated to reflect the treatment of our Civil Nuclear North America Services business as non-core (disposal announced in September 2019). See Note 1 for details

4 Organic change at constant translational currency ('constant currency') by applying FY 2018 average rates to 2019 and 2018 numbers excluding M&A. All commentary is provided on an organic basis unless otherwise stated

5 Free cash flow is defined as operating cash after capital expenditure, pensions and taxes, before payments to shareholders, payments to investigating authorities and M&A. Excludes cash costs of 2018 restructuring plan. The derivation of free cash flow is shown in Note 24

 

 

 

2020 Outlook

 

Commenting on the outlook for 2020, Warren East added: "The changes we have been implementing over the past two years are creating a tangible and sustainable cultural and performance shift. The momentum we gained in 2019 underpins our confidence for the year ahead. We will continue to make progress against our key drivers of improving OE losses, growing aftermarket cash flow, and controlling our indirect costs, while investing significantly in R&D to enable our future growth.

 

There are macro risks to navigate in 2020, notably the outbreak of COVID-19. The situation is still evolving, and as such our guidance for 2020 excludes any material impact. We are monitoring developments, taking mitigating actions, and will update the market as appropriate. Core operating profit growth is expected to be around 15%, with at least £1bn of FCF in 2020, as we drive towards our ambition to exceed £1 per share of FCF - or at least £1.9bn - in the mid-term.

 

We see a significant opportunity in the years ahead to lead the transition to providing low carbon power and we made significant progress on this strategy in 2019. We will continue to invest in developing increasingly efficient engines, exploiting new technologies, and innovating to become a disruptor in new areas. We are increasingly well placed to realise our long-term aspiration to be the world's leading industrial technology company."

 

 

 

Detailed 2020 guidance

 

 £m

2019^

2020 Outlook

 

 

 

Underlying revenue1

 

 

Civil Aerospace

8,107

Stable to low single-digit growth

Power Systems^

3,306

Low single-digit growth

Defence

3,250

Stable to low single-digit growth

ITP Aero

936

Stable

Corporate / eliminations

(577)

Stable

Core2 revenues

15,022

Stable to low single-digit growth

Non-core (including Bergen)^

428

 

Group revenues

15,450

 

 

 

 

Underlying operating profit1

 

 

Civil Aerospace

44

50-100bps margin improvement*

Power Systems^

375

0-100bps margin improvement

Defence

415

Stable

ITP Aero

111

50-100bps margin improvement

Corporate / eliminations

(117)

£(60)-(80)m

Core2 underlying operating profit

828

Around 15% growth

Non-core (including Bergen)^

(20)

 

Group underlying operating profit

808

 

 

 

  

*Civil Aerospace profit improvement despite headwind from £100-150m lower capitalisation of R&D in 2020

^For 2020 guidance purposes Power Systems 2019 is shown excluding Bergen, which is included in non-core to reflect treatment from 2020

 

1 Underlying: for definition see Note 2

2 Core includes Civil Aerospace, Power Systems, Defence and ITP Aero. Non-core includes Commercial Marine sold on 1 April 2019, Rolls-Royce Power Development sold on 15 April 2019, Bergen (for 2020 guidance purposes only), Civil Nuclear North America Service business and other smaller non-core businesses.

3 The prior year has been restated to reflect the treatment of our Civil Nuclear North America Services business as non-core (disposal announced in September 2019). See Note 1 for details

4 Organic change at constant translational currency ('constant currency') by applying FY 2018 average rates to 2019 and 2018 numbers excluding M&A. All commentary is provided on an organic basis unless otherwise stated

 

 

·        Net R&D cash spend is expected to be broadly stable at ~£1.1bn

·        Capitalised R&D should reduce by £100m-£150m reflecting lower capitalisation in Civil Aerospace

·        Capex (PPE) is expected to be £100m-£150m higher reflecting higher investment in Trent 1000 spare engines as we take further pro-active steps to reduce customer disruption in 2020

·        Trent 1000 in service cash costs expected to be £450m-£550m

·        P&L finance costs are expected to be broadly stable (2019: £223m); cash flow finance costs modestly lower reflecting gross debt reduction in 2019 (2019: £73m)

·        P&L underlying tax rate is expected to be in the low-to-mid 30s in 2020 (2019: 47.9%); Cash tax paid expected to increase to £260m-£290m (2019: £175m), mainly due to the timing of payments in the US and Germany

·        As part of our ongoing portfolio evaluation to create a simpler, more focused group, we are announcing today that we are carrying out a strategic review of our Bergen medium speed gas and diesel engine business. Bergen will be reported within non-core businesses in 2020 results. For guidance purposes 2019 results are shown on this basis with our 2020 divisional guidance above

·        All guidance presented for 2020 excludes any material impact from COVID-19

 

 

This announcement has been determined to contain inside information.

Enquiries:

 

Investors:

 

 

Media:

 

Peter Lapthorn

+44 (0) 7717 811 069

 

Richard Wray

+44 (0) 7974 918416

 

Photographs and broadcast-standard video are available at www.rolls-royce.com.

A PDF copy of this report can be downloaded from www.rolls-royce.com/investors.

This Full Year Results announcement contains forward-looking statements. Any statements that express forecasts, expectations and projections are not guarantees of future performance and will not be updated. By their nature, these statements involve risk and uncertainty, and a number of factors could cause material differences to the actual results or developments. This report is intended to provide information to shareholders, is not designed to be relied upon by any other party, or for any other purpose and the Company and its directors accept no liability to any other person other than under English law.

 

Results presentation

A presentation will be held at 09:00 (GMT) today. Details of how to join the event online are provided below. Downloadable materials will be available on the Investor Relations section of the Rolls-Royce website from the start of the event.

 

Online webcast registration details:

To register for the live webcast, including Q&A participation, please visit the following link:

 

 https://edge.media-server.com/mmc/p/724ns9b4

 

Please use this same link to access the webcast replay which will be made available shortly after the event concludes.

 

 

Chief Executive Review

 

In 2019, how we got to our destination - strong progress across the Group - gives me increased confidence that the changes we have been implementing over the past two years are creating a tangible and sustainable cultural and performance shift within our business.

 

We had a good end to the year including strong Civil Aerospace aftermarket performance, record widebody engine deliveries, and better trading in Power Systems despite tough market conditions. Defence performed well throughout the year with a record order intake and healthy cash performance. As a result, we delivered improved financial results including a 25% increase in underlying operating profit and further strong improvement in Civil Aerospace. This contributed to strong Group free cash flow of £873m, another significant step towards achieving at least £1bn in 2020. We also continued to invest in the new technologies which are so vital to remaining competitive. This was all achieved despite the in-service challenges with the Trent 1000, which could have derailed our progress. The fact that they did not, is thanks to the focus of our people on their roles in delivering for the business.

 

I spoke last year of needing to build beyond the breakthrough we could see occurring as we launched our restructuring and adopted our new operating structure. We have generated real momentum during 2019, not least in respect to costs, as we scrutinised our spending with intense rigour and really challenged ourselves to act differently. There is, however, no denying the fact that the durability issues with the Trent 1000 weighed heavily on 2019, in terms of the financial cost of returning the fleet to the levels of service our customers expect and dealing with the unacceptable disruption we have caused them. As a result of the Trent 1000 and as announced in November, we are recognising a net exceptional charge of £1,361m within our financials, contributing to a reported loss of £(852)m.

 

We have fixes designed for all but one of the issues identified and are well advanced on certification and rolling them out into the fleet. As the year drew to a close, we carried out a detailed technical re-evaluation of our progress on the final fix, a new high pressure turbine blade for the Trent 1000 TEN. Based upon that work and test activity, we reset our financial and operational expectations for the engine in November, based on a revised estimate of final blade durability, in order to provide certainty for customers and greater clarity for investors. Since then, we have made good progress on the design of this blade, and continue to expect certification of this component in the first half of 2021.

 

We believe in the positive transforming potential of technology and have a passion for solving difficult problems. Today, one of our society’s greatest technological challenges is the need for lower carbon power and we have a crucial role to play in decarbonising the sectors in which we operate. Firstly, we are committed to further reducing the environmental impacts of our products and services. We are following up our success as the developer of the world’s most efficient civil large engine in service today, the Trent XWB, with our next generation UltraFan. We are also heavily involved in the drive for alternative sustainable fuels. Secondly, we are committed to developing new low emission technologies. During 2019, we made significant progress, including the acquisition of Siemens’ eAircraft business and ground tests of our megawatt generator for the E-Fan X demonstrator with Airbus. Thirdly, we are working to reduce the greenhouse gas emissions from our own operations and facilities to zero by 2030.

Our ability to pioneer the decarbonisation of aviation builds upon the experience of our Power Systems business in hybrid and electrical power across a range of sectors. During the year, we signed customer contracts and framework agreements for hybrid solutions for the rail and yacht markets. In early 2020, we further enhanced our capabilities with the acquisition of a majority holding in power storage specialist Qinous, which will enhance our microgrid development activities. 

 

I believe the coming year will mark another important step towards generating significant returns from the market positions Rolls-Royce has spent many years securing. The value embedded within our business, most obviously within our installed base of widebody engines and order book, must be fully unlocked. Our sights are firmly set upon a mid-term ambition to exceed £1 of free cash flow per share, which translates to at least £1.9bn of free cash flow. To secure this in a sustainable way means reinforcing behavioural change across our business, driving pace and simplicity, developing a thirst for continuous improvement and ensuring disciplined investment in the new technologies we require to exploit the opportunities that we can see across all our markets. We will push harder and further in 2020, towards becoming the world's leading industrial technology company.

 

Trading Summary

 

Core2 Trading Summary

The income statement table below and all commentary relate to the underlying performance of our core business and percentage or absolute change figures in this document are on an organic basis, unless otherwise stated.

 

Summary income statement

£m

20191

20181,3

Change

Organic4 change

Underlying revenue

15,261

14,286

+7%

+6%

Underlying OE revenue

7,373

7,172

+3%

+3%

Underlying services revenue

7,888

7,114

+11%

+10%

Underlying gross profit

2,342

2,240

+5%

+4%

Gross margin %

15.3%

15.7%

-40bps

-40bps

Commercial and administration costs

(938)

(977)

-4%

-4%

Restructuring

(15)

(14)

+7%

+7%

Research and development charge

(688)

(650)

+6%

+5%

Joint ventures and associates

109

32

+241%

+222%

Underlying operating profit

810

631

+28%

+25%

Underlying operating margin

5.3%

4.4%

+90bps

+80bps

Financing costs

(223)

(148)

+51%

+49%

Underlying profit before tax

587

483

+22%

+17%

Tax

(281)

(153)

+84%

-

Underlying effective tax rate

47.9%

31.7%

-

-

Underlying (loss)/profit

306

330

-7%

-12%

Underlying earnings per share

15.9

17.3

-1.4p

-2.4p

1 Underlying: for definition see Note 2

2 Core includes Civil Aerospace, Power Systems, Defence and ITP Aero.

3 The financial information for the prior period has been restated to reflect the treatment of our Civil Nuclear North America Services business as non-core. See note 1 for more details

4 Organic change at constant translational currency ('constant currency') by applying FY 2018 average rates to 2019 and 2018 numbers excluding M&A. All commentary is provided on an organic basis unless otherwise stated

 

Revenue up 6%

Revenue increased by 6% to £15,261m reflecting growth in both OE and services, led by Civil Aerospace and Power Systems. Civil Aerospace delivered OE revenue growth of 4% reflecting higher widebody engine volumes. Services revenue in Civil Aerospace rose 14% with increased shop visit volumes and higher sales of spare parts. Power Systems achieved 4% OE revenue growth due to strength in power generation markets, notably for data centres, and 4% services growth including increased long-term service agreement (LTSA) penetration. Defence revenue was 1% higher led by 4% growth in services driven by increased activity in transport and combat. ITP Aero revenue increased 21% reflecting volume growth largely across its civil programmes.

 

Gross profit up 4%

Gross profit was £2,342m, up 4%. Civil Aerospace gross profit improved by 25% reflecting several key factors:

·    increased sales of spare parts and higher LTSA servicing activity

·    a material improvement in the net impact of contract catch-ups to LTSA profits at £33m in 2019 (2018: £(276)m), driven primarily by lower servicing costs in business aviation; and

·    modestly lower LTSA underlying gross margins, reflecting shop visit mix, and around ~£70m of FX related headwind principally reflecting the revaluation of USD creditors and deposits

 

Power Systems generated a 6% gross profit improvement with a gross margin of 26% driven by volume growth and improvements in product mix. As expected, Defence gross profit reduced by 6% with margins 160bps lower, reflecting product mix. ITP Aero gross profit increased by 33% with margin improvement of 200bps, driven by higher OE volumes, improved pricing and a ~£25m benefit from the impact of a change made to simplify ITP Aero's trading relationship and contractual terms with Civil Aerospace. This was net neutral at the Group level, with a corresponding increase in eliminations.

 

 

C&A costs down 4% 

C&A costs reduced by 4% to £938m. This reduction was driven by restructuring programme headcount savings and management actions to reduce discretionary spend, partly offset by cost escalation and higher sales-related activities in Power Systems.

 

Self-funded R&D cash spend up modestly; charge to profit 5% higher

Gross R&D spend was up £70m. After funding from customers and other third parties, core self-funded cash spend was £3m higher at £1,108m. Investment in Civil Aerospace widebody and new business aviation programmes was lower following the recent entry into service of several new engine programmes. New technology investment increased by 9%, to develop technologies that underpin UltraFan in Civil Aerospace, a range of new programmes in Defence and electrification in Power Systems. R&D capitalisation of £468m was £28m lower. Capitalisation remains at a significant level due to the current development stage of several Civil Aerospace programmes but is expected to reduce in 2020 and over the coming years. The net charge to profit increased by £35m reflecting higher spend and the reduction in capitalisation.

 

Profit from joint ventures and associates

Our share of results from joint ventures was £109m, £71m higher than the prior year. This was driven by increased servicing activity in overhaul bases and higher profit on disposal of engines in Rolls-Royce & Partners Finance (our engine financing joint venture).

 

Operating profit up 25%

Operating profit improved by £157m on the prior year to £810m, led by the £85m increase in gross profit, higher JV profit and a £37m reduction in C&A costs, partially offset by the higher R&D charge outlined above.

 

Financing costs

Financing costs increased from £(148)m in 2018 to £(223)m in 2019. Within financing costs, net interest payable of £(132)m increased by £60m largely due to the adoption of IFRS16. Other financing costs were £(91)m in 2019, modestly higher than the previous year (2018: £(76)m). Other financing costs include charges relating to the factoring of receivables and the discounting of prior year provisions.

 

Taxation

The core underlying tax charge was £281m (2018: £153m), an underlying tax rate of 47.9% compared with 31.7% in 2018. This increase in rate was primarily driven by the non-recognition of a deferred tax asset on UK losses arising in 2019.

 

Trent 1000

The Trent 1000 is 13% of our widebody engine fleet. We made good progress on resolving the technical issues in 2019; we have now designed eight of the nine component fixes required, seven of which have been certified. The intermediate pressure turbine fix is now fitted to almost 100% of the in-service fleet across all engine variants. The revised intermediate compressor has now been fitted to over 50% of package C engine variants and has now been certified for the Trent 1000 TEN variant with the package B planned for the second half of 2020. Roll-out of the revised high pressure turbine blade has been embodied into almost 50% of package B and C engine variants and design work for the Trent 1000 TEN high pressure turbine blade continues to progress well with certification expected in the first half of 2021.

 

We continue to regret the disruption caused to our customers from these issues. We are taking further positive steps in 2020 to increase availability of spare engines and further expand maintenance capacity to reduce the number of aircraft on the ground (AOG) to below ten by the end of Q2 2020. We have seen positive results from our actions in the first two months of 2020 with aircraft on the ground reduced to the mid-30s from the elevated level of 42 in the second half of 2019, which had resulted from the proactive actions taken in autumn to retrofit the small number of remaining Package B intermediate pressure turbine modules.

 

In November we announced the outcome of recent testing and a thorough technical and financial review of the Trent 1000 TEN programme following the issues identified during 2019. This resulted in a revised timeline and durability estimate for the improved Trent 1000 TEN HP turbine blade.  As a result we expect total in-service cash costs across all Trent 1000 variants of around £2.4bn across 2017-2023, consistent with the trading update in November. In 2019, £578m of cash costs were incurred, partly offset by a £173m insurance receipt. We continue to expect cash costs of £450-£550m in 2020 and a similar level in 2021, before declining significantly thereafter. These primarily comprise the cost of replacing affected parts as well as customer disruption related compensation.

 

Outside of these in-service costs, we are also investing in our engineering function, further expansion of our MRO capacity and our pool of Trent 1000 spare engines. Additionally, the increased costs associated with our revised estimate for HP turbine blade durability on the Trent 1000 TEN has impacted the future margins on our Trent 1000 contracts, including a small number of contracts now becoming loss making (see below).

 

As guided in November, an exceptional charge of £1,361m at underlying FX rates was recorded in 2019 on the Trent 1000 (net of £173m insurance receipts). Within this charge, £703m is due to the additional cash costs associated with customer disruption and remediation shop visits. The remaining £658m relates to the margin impact of our updated HP turbine durability expectations on the Trent 1000 TEN, primarily the up-front recognition of future losses on the small number of contracts which are now loss making, as well as related contract accounting adjustments.

 

Exceptional restructuring programme

Progress was made in 2019 on our restructuring plan. To date we have achieved a net headcount reduction of around 2,900 with run-rate savings of £269m. Cash costs of £216m were incurred during the year to deliver this plan, which are reported outside of free cash flow. We continue to expect run-rate savings of ~£400m by the end of 2020 and a net headcount reduction of 4,600.

 

Strategic review of Bergen

As part of our ongoing efforts to evaluate our portfolio and create a simpler, more efficient Group, today we announce the decision to carry out a strategic review of Bergen, our medium speed gas and diesel engine business. Bergen formed part of Power Systems during 2019, but from 2020 (as a result of this review) it will be reclassified as non-core. Additionally, following a reassessment of the order book, an impairment review has been completed in the second half of the year and a charge of £58m has been recorded outside underlying results in 2019. In 2019 Bergen generated sales of £239m and an underlying operating loss of £(18)m.

 

A380 cessation costs

In our full year 2018 results we took a preliminary view of costs relating to Airbus' decision to close the A380 production line. During the first half of 2019 we had the opportunity to update our impact assessment and as a result recorded an additional exceptional charge of £59m. This charge has been reduced to £48m at the year-end following the release of £11m relating to supplier amounts recorded in 2018.

 

IFRS 16

IFRS 16 is effective for the year beginning 1 January 2019. Commitments for operating as well as finance leases are now recognised on the balance sheet. The impact of the standard is as follows:

·    on January 1st 2019 an additional lease liability of £2,248m and lease assets of £2,213m were recorded on the balance sheet

·    in the income statement rental payments (previously included within operating costs) are now replaced with a depreciation charge on the leased assets. Underlying financing costs on lease liabilities increased from £5m in 2018 to £77m in 2019 due to the new liability

·    there is no impact on free cash flow resulting from the implementation of IFRS 16; and

·    we estimate the overall impact of the adoption of IFRS 16 in 2019 was approximately a 2p reduction in underlying EPS

 

Group Trading Summary

 

Group results include core and non-core businesses. Group underlying revenues rose 7% to £15,450m, primarily driven by growth in Civil Aerospace, offsetting a (76)% decline in non-core revenue. Group underlying operating profit improved by 25% to £808m as a result of improved gross profit, lower C&A costs and higher profit from joint ventures offsetting an increased R&D charge.

 

 

Group Funds Flow

 

Free cash flow

Group free cash flow of £873m improved materially from £568m in 2018. This was driven by strong profit growth across most of our core businesses, increased engine flying hour receipts and spare parts sales in Civil Aerospace, as well as reduced capital expenditure on several capacity and facility modernisation projects which had neared completion in 2018. Trent 1000 in-service cash costs were £578m (2018: £431m), partially offset by receipt of £173m of related insurance proceeds. R&D investments increased modestly.

 

In 2019 there was an inflow of £574m (2018: £1,197m) from the movement in receivables and payables,  reflecting higher trade payables due to increased trading activity, actions taken to improve overdue debt collection, together with a number of customer deposits notably in Defence. This was partly offset by a £(43)m increase in inventory (2018: £(616)m).

 

We continue to strive to increase transparency around our financial performance and reported results. As part of this effort, additional information is now provided in note 14 on the sale of trade receivables. For many years, the Group has undertaken the sale of trade receivables, without recourse, to help normalise Group cash flows in line with physical delivery volumes. This practice is commonplace in the aerospace industry. Over the last three years this has averaged around £1,037m at the year-end. At 31 December 2019 £1,117m had been drawn under factoring facilities, £95m higher than December 2018, which is reflected within working capital.

 

Given the one-off nature of the restructuring announced in 2018, the £(216)m cash costs relating to this restructuring programme (2018: £(70)m) are reported outside of Group free cash flow.

 

 

Summary funds flow statement 1

 

 

£m

2019

2018

Change

 

 

 

 

Underlying operating profit

808

616

192

Depreciation and amortisation

1,068

756

312

Lease payments (capital plus interest)

(319)

-

(319)

Expenditure on intangible assets

(591)

(680)

89

Capital expenditure (Property, Plant and Equipment)

(747)

(905)

158

Change in inventory

(43)

(616)

573

Change in receivables/payables

574

1,197

(623)

Civil Aerospace net LTSA balance change

754

679

75

Of which: underlying change

654

376

278

Of which: impact of contract catch-ups

100

303

(203)

Movement on provisions

(506)

(242)

(264)

Net interest received and paid

(73)

(70)

(3)

Trent 1000 insurance receipt

173

-

173

Other

(41)

22

(63)

Trading cash flow

1,057

757

300

Contributions to defined benefit pensions in excess of underlying PBT charge

(9)

59

(68)

Taxation paid

(175)

(248)

73

Group free cash flow

873

568

305

Of which: Disposed entities2

(41)

(78)

37

Group free cash flow (pre disposed entities)

914

646

268

Of which: Non-core businesses3

3

(2)

5

Core free cash flow

911

648

263

Shareholder payments

(224)

(219)

(5)

Disposals and acquisitions

410

573

(163)

Exceptional group restructuring

(216)

(70)

(146)

Payment of financial penalties

(102)

-

(102)

Foreign exchange

(98)

54

(152)

Pension fund contribution

(35)

-

(35)

Other

(87)

10

(97)

Change in net funds/(debt) excluding lease liabilities

521

916

(395)

1 The derivation of the summary funds flow statement above from the reported cash flow statement is included on note 24

2 Disposed entities include Commercial Marine and Power Development in 2019 and both of these plus L'Orange in 2018

3 Non-core businesses include the former Energy businesses not sold to Siemens and Civil Nuclear North America Services business

 

Depreciation and amortisation

The £312m increase in depreciation and amortisation to £1,068m was largely due to an additional ~£340m charge relating to right of use assets following the adoption of IFRS 16 from 1 January 2019.

 

Lease payments

Lease payments of £(319)m reflect the cash cost of leases in 2019. In 2018, prior to the adoption of IFRS 16, the equivalent lease payments were reflected within underlying operating profit. Under IFRS16 the depreciation charge is recorded in underlying operating profit.  

 

Expenditure on intangible assets

Intangible asset expenditure of £(591)m was incurred in 2019. This included £(481)m of R&D capitalisation (2018: £498m) largely reflecting ongoing investment in Civil Aerospace programmes including the Trent 7000, Trent XWB and Pearl engine programmes.

 

Capital expenditure on property, plant and equipment

Investment of £(747)m in 2019 reduced by £158m (2018 (£905m)) due to several capacity and modernisation programmes nearing completion in 2018. Spend in 2019 reflects our ongoing investment in manufacturing capability, projects to modernise our facilities, and spare engines to support our growing in-service fleet in Civil Aerospace.

 

 

Change in inventory

Inventory increased by £(43)m (2018: £(616)m) in 2019 due to volume growth in Civil Aerospace and Power Systems, with a significant improvement in the second half following a £(433)m increase in H1. This H1 inventory position was driven by a high level of assembled engines and aftermarket parts held in Civil Aerospace, as well as growth in Power Systems due to programme delays, production relocation projects, and product mix. Higher delivery volumes and greater focus on supply chain management in the second half of the year drove a significant reduction in inventory, with a strong improvement in Civil Aerospace in particular.

 

Change in receivables/payables                             

The change in receivables/payables of £574m in 2019 was significantly reduced year-on-year, and  reflected:

·    higher trade and other payables due to increased trading activity led by Civil Aerospace

·    a number of customer deposits, notably in Defence driven by strong order intake; and

·    an increase in trade and other receivables, which reflected volume-related growth partially offset by actions taken to reduce overdue customer receivables

 

Movement in underlying Civil Aerospace net LTSA balance

The net LTSA balance represents deferred revenue and is a core part of our business model where we receive payments from our customers in respect of our long-term service and overhaul agreements. In 2019 the LTSA net balance increased by £754m. This movement included a £100m increase driven by negative contract catch-ups to revenues (2018: £303m). The underlying change net of these catch-ups was £654m. This reflected invoiced engine flying hour receipts in excess of revenue traded together with customer deposits received in the year.

 

Movement in provisions

The movement in provisions of £(506)m in 2019 largely included utilisation of the Trent 1000 exceptional provision. The remainder primarily covered cash costs from onerous contracts and restructuring activity.

 

Pensions

Cash contributions were in line with the profit and loss charge in 2019. There was a £(68)m year-on-year movement, reflecting the non-recurrence of a 2018 benefit from changing to quarterly payments.

 

Taxation

The decrease in cash tax in 2019 from £248m to £(175)m reflected lower payments in Germany compared to 2018, largely due to timing.

 

Shareholder payments

Payments to shareholders of £224m in 2019 remained in line with the prior year.

 

Acquisitions and disposals

In 2019 we completed the disposals of Commercial Marine and Rolls-Royce Power Development with combined net proceeds of £453m. The £573m cash inflow in 2018 related to the disposal of the L'Orange business, previously within Power Systems. Costs of £43m were incurred in 2019 relating to the acquisition of Siemens' eAircraft business.

 

Payment of financial penalties

Following the agreements reached with investigating authorities in January 2017, a payment schedule was established. No payments were due in 2018 and a £102m payment was made in 2019. In 2020 and 2021, £130m and £148m (plus interest) are due respectively. Consistent with prior years this payment is reported outside of free cash flow.

 

 

 

 

 

Balance Sheet

 

                                                                                                     31 Dec 2018

Summary balance sheet

£m

 

31 Dec
2019



Excluding Civil
Nuclear


 


Civil Nuclear

 

 


Total


Change excluding Civil Nuclear
 

Intangible assets

5,442

5,278

17

5,295

164

Property, plant and equipment

4,803

4,919

10

4,929

(116)

Right of use assets

2,009

-

-

-

2,009

Joint ventures and associates

402

412

-

412

(10)

Contract assets and liabilities

(8,745)

(7,074)

1

(7,073)

(1,671)

Working capital 1

(1,136)

(1,263)

8

(1,255)

127

Provisions

(2,804)

(1,916)

(1)

(1,917)

(888)

Net funds 2

(993)

631

(20)

611

(1,624)

Net financial assets and liabilities 2

(3,277)

(4,117)

-

(4,117)

840

Net post-retirement scheme (deficit)/ surplus

(208)

641

-

641

(849)

Tax

1,136

1,024

2

1,026

112

Held for sale

3

391

(17)

374

(388)

Other net assets and liabilities

14

22

-

22

(8)

Net liabilities

(3,354)

(1,052)

-

(1,052)

(2,302)

Other items

 

 

 

 

 

US$ hedge book (US$bn)

37

37

 

37

-

Civil Aerospace LTSA asset

1,086

1,097

 

1,097

(11)

Civil Aerospace LTSA liability

(6,784)

(5,584)

 

(5,584)

(1,200)

Civil Aerospace net LTSA liability

(5,698)

(4,487)

 

(4,487)

(1,211)

1  Net working capital includes inventory, trade receivables and payables and similar assets and liabilities.

2  Net funds includes £243m (2018: £293m) of the fair value of financial instruments which are held to hedge the fair value of borrowings.

 

Key drivers of balance sheet movements were:

 

Intangible assets

The net increase of £164m includes R&D additions of £481m, primarily related to engine programmes in Civil Aerospace £(426)m, together with further investment in software applications of £101m. These were offset by impairment charges of £54m following the announcement of the strategic review of the Bergen business and the sale of the Civil Nuclear North America Services business in Power Systems. Amortisation for the period was £(318)m. 

 

Property, plant and equipment

Following the adoption of IFRS 16, finance leased assets previously held in PPE have been transferred to right of use assets. Capital additions of £767m related to investments in maintenance, repair and overhaul (MRO) capacity in Civil Aerospace and the modernisation of facilities including our Defence facility in Indianapolis. We also expanded our spare engine lease pool to support our growing in-service widebody engine fleet. These were offset by depreciation of £(491)m.

 

Right of use assets

IFRS 16 was adopted effective 1 January 2019 resulting in the recognition of leased assets with a value of £2.2bn. See notes 1 and 25 in the consolidated financial statements for more information.


Investments in joint ventures and associates

There was no material change in our investment in joint ventures and associates year-on-year.

 

Contract assets and liabilities

This represents deferred revenue and is a core part of our business model where we receive payments from our customers in respect of our long-term service and overhaul agreements. In 2019 this increased by £(1,671)m, of which £(1,211)m related to the Civil Aerospace LTSA balance. The remainder largely covered advance payments in several businesses. The movement in the Civil Aerospace LTSA balance of £(1,211)m included non-cash items of £557m, primarily related to foreign exchange and the cumulative negative impact of contract catch-ups to LTSA revenue. The change, net of these items, of £(654m) reflected invoiced engine flying hour receipts and customer deposits in excess of underlying revenue traded in the income statement.

 

Working capital

Working capital increased by £127m. This reflected a financial penalty payment of £102m related to agreements reached with investigating authorities in January 2017, and a £245m reduction in working capital from the settlement of deferred consideration for the acquisition of ITP Aero. These factors offset the reduction in working capital seen in the funds flow.

 

Provisions

Provisions increased by £888m largely driven by the incremental exceptional charge related to Trent 1000 disruption and related onerous contract losses, partly offset by utilisation.

 

Net funds

Net funds have moved from a net cash position of £611m in FY 2018 to a net debt position of £(993)m. This was driven by the adoption of IFRS 16 Leases, which increased lease liabilities by £(2,248)m. Excluding lease liabilities, net cash stood at £1,361m at FY 2019. For other movements see funds flow commentary in note 24.

 

Net financial assets and liabilities

These items principally relate to the fair value of foreign exchange, commodity and interest rate contracts. The reduction in the net liability of £840m largely reflected settlement of derivative contracts in 2019.

 

Net post-retirement scheme deficits

The £(849)m movement was primarily driven by the buy-in agreement with Legal & General Assurance Society Limited, which resulted in a decrease in the surplus of the UK pension plan of around £(600)m. There were also changes in financial and demographic assumptions.

 

US$ hedge book

The US hedge book at 31 December 2019 was $37bn. It extends to 2028 on a declining basis and remains sufficient to cover our medium-term requirements.

 

 

Group Reported Results

 

The changes resulting from underlying trading are described in the trading summary below.

Consistent with past practice, we provide both reported and underlying figures. As the Group does not generally hedge account for forecast transactions in accordance with IFRS 9 Financial Instruments, we believe underlying figures are more representative of the trading performance by excluding the impact of period-end mark-to-market adjustments. In particular, the USD:GBP hedge book has a significant impact on the reported results. In 2019, the GBP:USD rate rose from 1.28 to 1.32 while the GBP:EUR rose from 1.12 to 1.18. The adjustments between the underlying income statement and the reported income statement are set out in Note 2 to the Condensed Consolidated Financial Statements. This basis of presentation has been applied consistently.

 

£m

Revenue

Profit before financing

Financing

Profit/(loss) before tax

 

 

2019

2018

2019

2018

2019

2018

2019

2018

 

Underlying

15,450

15,067

808

616

(225)

(150)

583

466

1

Foreign exchange and derivatives

1,137

781

144

(24)

75

(1,984)

219

(2,008)

2

Exceptional programme charges

-

(119)

(1,409)

(976)

-

(15)

(1,409)

(991)

3

Impact of discount rate charges

-

-

-

-

(40)

-

(40)

-

4

Exceptional restructuring charges

-

-

(136)

(317)

-

-

(136)

(317)

5

M&A gains & effects of acquisition accounting

-

-

(24)

28

(8)

(8)

(32)

20

6

Impairments and asset write-offs

-

-

(84)

-

-

-

(84)

-

7

Net post-retirement scheme financing, pension equalisation & other

-

-

(12)

(130)

20

13

8

(117)

 

Reported

16,587

15,729

(713)

(803)

(178)

(2,144)

(891)

(2,947)

See Note 2 to the Condensed Consolidated Financial Statements for further details

 

 

The most significant items included in the reported income statement, but not in underlying are summarised below.

 

1   Foreign exchange and derivatives included the impact of the following:

·    the impact of measuring revenue and profit before financing at spot rates rather than achieved hedge rates

·    mark-to-market adjustments on the Group's net hedge book of £(7)m (2018: £(2,145)m). At each period end, our foreign exchange hedge book is included in the balance sheet at fair value ('mark-to-market') and the movement in the year included in reported financing costs; and

·    losses on derivatives settled during the period and the impact of valuation of assets and liabilities using the spot exchange rate rather than the exchange rate that is expected to be achieved by the use of the hedge book

 

2   Exceptional programme charges relating to the Trent 1000 of £1,361m and Trent 900 £48m are excluded from the underlying results. These have been explained in note 2.

3   Included in discount rate changes is £30m relating to Trent 900 and £10m relating to Trent 1000

4   Exceptional restructuring costs of £136m (2018: £317m). These are costs associated with the substantial closure or exit of a site, facility or activity related to the significant transformation project that the business is currently undertaking. A number of the projects within the transformation programme are for multiple years. Of the 2019 costs, £88m (2018: £223m) relate to the Group restructuring programme announced in June 2018.

5   The loss before tax of £(32)m (2018: £20m profit) relates to the effects of acquisition accounting £171m (2018: £183m) that principally relate to the amortisation of intangible assets arising on the acquisition of Power Systems in 2013 and ITP Aero in 2017. The Group completed the sale of the Commercial Marine business to KONGSBERG on 1 April 2019 and recognised a profit of £106m in 2019. Rolls Royce Power Development Limited was sold on 15 April 2019 with a gain arising on disposal of £33m. In our 2018 financial statements, we reported an impairment charge of £155m in relation to the Commercial Marine business being disclosed as held for sale and recognised a gain on the sale of L'Orange of £358m. Together with the £183m acquisition accounting effect relating to ITP Aero this resulted in the £20m profit before tax in 2018. Further details can be found in note 23.

6      On 26 September 2019 the Group announced the sale of the Civil Nuclear North America Services business and recognised an impairment charge and asset write offs of £26m. Following a reassessment of the Bergen order book and subsequent impairment review we have recorded a charge of £58m in 2019. Further details can be found in note 2.

7   Following a High Court judgement in October 2018, the estimated costs of equalising UK pension benefits for men and women was recognised as a past-service charge. There is no equivalent charge in 2019.

 

Tax affecting these adjustments resulted in a tax charge of £143m (2018: tax credit of £715m). The charge in 2019 is due to the non-recognition of deferred tax in respect of UK losses in the year. The 2019 charge also includes £86m relating to the derecognition of UK deferred tax assets on foreign exchange and commodity financial assets and liabilities.  In 2018 deferred tax was recognised on UK losses resulting in an overall credit in that year.

 

Civil Aerospace

 

Overview

Civil Aerospace delivered a record 510 widebody engines in 2019. We have continued to make progress reducing widebody average OE losses, down by 14% year-on-year to £1.2m. Our large engine installed fleet increased to over 5,000 engines in service, driving a 7% growth in widebody engine flying hours and a £0.3bn increase in aftermarket cash margin. 2019 saw strong revenue growth of 10% and further significant improvement in underlying operating profit for the business.

 

Financial overview

 

£m

 

 2019

 

 2018

 

Change

Organic

change

Engine deliveries

729

686

+6%

+6%

Underlying revenue

8,107

7,378

+10%

+10%

Underlying OE revenue

3,246

3,119

+4%

+4%

Underlying services revenue

4,861

4,259

+14%

+14%

Underlying gross profit

622

493

+26%

+25%

Gross margin %

7.7%

6.7%

+100bps

+90bps

Commercial and administrative

(299)

(336)

-11%

-11%

Restructuring

(7)

(8)

-13%

-13%

Research and development cost

(374)

(332)

+13%

+13%

Joint ventures and associates

102

21

+81

+78

Underlying operating result

44

(162)

+206

+195

Underlying operating margin %

0.5%

-2.2%

+270bps

+260bps

 

Underlying revenue

 

£m

 

2019

 

 2018

 

Change

Organic

change

Original Equipment

        3,246

        3,119

+4%

+4%

Large engine

        2,568

        2,373

+8%

+8%

Business aviation

           643

           620

+4%

+5%

V2500

             35

             126

-72%

-72%

Services

        4,861

        4,259

+14%

+14%

Large engine

        3,205

        2,666

+20%

+20%

Business aviation

           477

           464

+3%

+2%

Regional

           355

           292

+22%

+19%

V2500

824

837

-2%

-2%

 

Underlying revenue

Underlying revenue increased 10%, reflecting good growth in OE, up 4% to £3,246m and strong growth in services, up 14% to £4,861m. Large engine OE growth of 8% was driven by an increase of 41 in widebody engine delivery volumes to 510. This reflected strong growth in Trent 7000 engines for the A330neo production ramp-up.

 

Large engine service revenue increased 20% to £3,205m (2018: £2,666m) driven by higher servicing volumes. Major long-term service agreement (LTSA) shop visits rose 7% to 306 and check and repair visits, led by Trent 1000 activity, increased 16% to 660. Sales of spare parts not covered by LTSAs increased year-on-year. There was also a material reduction in negative contract catch-ups to revenues. 

 

In business aviation, OE sales were 5% higher with deliveries broadly stable at 219 engines (2018: 217 engines) reflecting improved mix, while service revenue increased 2%. Regional aviation service revenue increased 19% driven by the AE3007 and Tay-powered fleets. V2500 OE revenue was down 72% due to end-of-life production on the Airbus A320ceo. The 2% reduction in V2500 service revenue reflected a modest reduction in spare parts sales, with the payment from Pratt & Whitney Aero Engines International (PWAEI) relating to engine flying hours remaining stable.

 

Underlying operating profit

The underlying operating profit of £44m was an improvement of £195m reflecting higher gross profit, increased profit from joint ventures and lower C&A costs more than offsetting 13% higher R&D charge.

 

Gross profit improved by £121m and gross margin by 90bps. This was driven by increased servicing activity, higher spare parts sales, and a material improvement in the net impact of contract catch-ups to LTSA profits. In 2019 catch-ups had a £33m positive impact on profit (2018: £(276)m negative). This was driven by improvements in servicing costs in business aviation, which was partly offset by a reassessment of costs and utilisation across various widebody programmes. Gross profit was negatively affected by a modestly lower LTSA underlying margin due to the mix of shop visits, ~£70m of FX related headwind principally relating to the revaluation of USD creditors and deposits, and a modest impact from higher customer charges. The profit contribution from spare engine sales was relatively stable year-over-year.

  

Self-funded R&D cash spend reduced by £18m to £(767)m reflecting lower investment in existing widebody and business aviation programmes and an increase in next generation technology including the UltraFan demonstrator. Net R&D capitalisation was £60m lower, driven by widebody and business aviation development programme maturity. Overall, the R&D charge to profit increased to £(374)m from £(332)m in 2018. 

 

Underlying C&A costs were 11% lower year-on-year. Joint venture profit of £102m (2018: £21m) reflected increased servicing activity in overhaul bases and higher profit on disposal of engines in Rolls-Royce & Partners Finance (our engine financing joint venture).

 

Trading cash flow

Civil Aerospace trading cash flow improved £201m to £419m, driven by increased flying hour receipts from our growing in-service engine fleet, increased spare parts sales and lower capital expenditure. Cash costs on Trent 1000 in-service issues of £578m (2018:£431m) were partly offset by insurance receipts of £173m.

 

Cash inflow from working capital was significantly lower in 2019 notably due to the non-recurrence of a c.£400m benefit from standardisation of supplier payments in 2018. Year-on-year growth in inventory was significantly lower.

 

Operational and strategic review

Our top priority in 2019 remained securing the return of the Trent 1000 fleet to full health. We made major steps forward in rolling out fixes, expanding maintenance capacity and providing additional clarity to our customers. Much more work remains to be done in 2020. Importantly, we did not allow the Trent 1000 challenge to derail the much needed transformation of our business; significant progress was also made on near-term operational improvement, and we achieved a number of milestones in our longer term strategy to become a leader in the lower carbon future of aviation.

In 2019 we delivered 510 widebody engines, in line with guidance and a record figure for Rolls-Royce. This included the successful ramp up of the Trent 7000, with 106 engines delivered compared with just 8 engines in 2018. We continued to make progress in reducing our large engine average OE unit losses, which fell by 14% to £1.2m during the year, helped by a 22% improvement on the Trent XWB-84. We continue to expect to deliver our first breakeven Trent XWB-84 by the end of 2020. Thanks to these record engine deliveries, our large engine installed base grew by 6% in 2019 and crossed the 5,000 mark to 5,029 engines. 

Overall, the performance of our fleet continues to be very strong, with invoiced engine flying hours increasing by 7% to 15.3 million. The Trent 700, the largest part of our installed base at 32%, has crossed 55 million flying hours and continues to deliver excellent performance in fuel burn, reliability and durability. The Trent XWB became our second largest Trent programme by volume in 2019, and has now flown over 5 million hours. As we highlighted in November, fleet leading Trent XWB-84 engines have reached our original expectations for time-on-wing. The Trent 7000 has made an excellent entry into service, with 80 engines now flying and a dispatch reliability of 99.9%. The Trent 1000 is 13% of our widebody fleet and we continue to work to improve durability and reduce customer disruption. To this end we announced actions to boost our maintenance capacity and add additional spare engines, with a significant investment in 2020 set to drive a ~50% increase in our Trent 1000 spare engine pool. We also gave greater certainty to customers and clarity to investors following an extensive review of the programme. Our focus is now on executing the clear plan we have to reduce aircraft on ground and return the fleet to the level of service which our customers expect.

 

In business aviation, 2019 was a year of milestones. The Bombardier Global 5500 and Global 6500, both powered by our Pearl 15 engine, received EASA and FAA certification. In November, we also announced the new Pearl 700 to power the upcoming Gulfstream G700. The Pearl family now powers two airframer platforms, bolstering our position as the leader in the large cabin, long-range market.

 

Our transformation and cost reduction efforts accelerated during the year, and Civil Aerospace made the largest contribution towards the group's 1,600 net headcount reduction in 2019. The removal of roles was enabled by increased use of digital technologies, largely in engineering, simplification of processes and removal of duplication.

 

We are determined to seize the opportunity of becoming a leader in the provision of lower carbon air power. This means not only improving our existing gas turbine technology to be more fuel efficient with lower carbon emissions, but also pioneering future technologies that will enable a low carbon future for aviation. We reached an important milestone with design freeze on UltraFan, which will be 25% more efficient than original Trent engines and 10% more efficient than the Trent XWB, the world's most efficient large engine in service today. We also carried out successful tests of the composite fan system, a key technology enabler for UltraFan to reduce weight and increase fuel efficiency.

 

On future technologies, we have taken significant steps towards increasing our capabilities in hybrid electric propulsion. During the year we acquired the eAircraft business from Siemens and achieved major milestones in three of our key electric demonstrator programmes:     

·    In August we began ground tests of our 2.5-megawatt generator in Norway. This forms part of our E-Fan X project with Airbus, the largest hybrid aircraft demonstrator in the world

·    In November we announced a flight demonstrator based on our hybrid M250 propulsion system with APUS and the Brandenburg University of Technology, paving the way for experimental flights after 2021.

·    In December we unveiled the plane which will seek to break the speed record for an all-electric aircraft in 2020 as part of our ACCEL programme

 

Outlook

During the year we booked a net widebody order intake of 213 engines. As a result, our widebody backlog at the end of 2019 was 1,978 engines, providing good visibility on our deliveries in the coming years and driving continued growth in our installed base. The long term trends supporting air traffic growth remain intact, though the outbreak of COVID-19 represents a near term macro risk. In 2019, approximately 20% of our invoiced engine flying hours were derived from the greater China region. We have a small number of tier one suppliers in the Greater China region, all of whom have resumed operations. We are in daily communication and are offering support as appropriate.

 

Although currently subdued, we expect an improvement in widebody orders driven by a replacement cycle in the coming years as a growing number of aircraft reach retirement age, including Boeing 777s, Boeing 767s and older Airbus A330s. We believe we are well positioned to continue to win a large share of these orders, having captured 64% of gross order intake and 52% of net orders for widebody engines in 2019. The increase in retirements in the coming years represents a challenge for the industry, but we are favourably positioned due to the younger age distribution of our fleet relative to our competitors. The average age of our widebody in-service fleet is less than 8 years, compared to the industry average (ex. Rolls-Royce) of 13 years. As a result, we continue to expect strong growth in our installed base in the coming years, which supports growth in our engine flying hours and the widebody aftermarket cash margin.

 

In 2020 we expect stable to low-single-digit sales growth in Civil Aerospace and operating margins 50-100bps higher year-over-year, despite a £100-150m reduction in the level of R&D capitalisation.

 

Power Systems

 

Overview

Power Systems made good progress in 2019, with sales continuing to outgrow global GDP and gross margins improving due to operating leverage and a better product mix. We continued to advance our services strategy, with strong growth in LTSA sales a particular highlight. Order intake was good at £3,415m, a book-to-bill of 1.0x.

 

Financial overview^

 

£m

 

2019

 

2018

 

Change

Organic

change

Underlying revenue

3,545

3,434

+3%

+4%

Underlying OE revenue

2,386

2,310

+3%

+4%

Underlying services revenue

1,159

1,124

+3%

+4%

Underlying gross profit

909

866

+5%

+6%

Gross margin %

25.6%

25.2%

+40bps

+50bps

Commercial and administrative

(374)

(363)

+3%

+4%

Restructuring

-

(1)

-

-

Research and development cost

(176)

(188)

-6%

-6%

Joint ventures and associates

(2)

1

-

-

Underlying operating profit

357

315

+13%

+15%

Underlying operating margin %

10.1%

9.2%

+90bps

+90bps

 

^Commentary and figures exclude the Civil Nuclear North America Services business which has been treated as non-core following its disposal in February 2020

 

Underlying revenue

Underlying revenue of £3,545 increased by 4%, OE revenue was up 4% driven by strong demand for mission critical power generation products, notably to serve the data centre market. This growth more than offset an expected reduction in demand from the construction & agriculture sectors, following the non-recurrence of the emissions-led pre-buy effect seen in 2018.

 

Services revenue rose 4% reflecting higher spare parts sales and 6% growth in LTSAs. We continue our focus on generating greater value from our large installed base, both through a more proactive approach to spare parts sales and a greater emphasis on LTSA sales which now account for ~12% of total service revenues.

 

Underlying operating profit

Underlying operating profit rose by 15% to £357m, led by revenue growth. Gross profit was 6% higher at £909m, helped by a 50bps increase in gross margins to 25.6%, due to better product mix. C&A costs of £(374)m were 4% higher year-on-year reflecting cost escalation, additional spend on digital solutions, and higher sales-related activities. The R&D charge reduced by £11m reflecting the timing of key projects, with cash spend modestly higher. In the coming years we expect R&D spend in Power Systems to increase as we ramp up activity on new programme investment and our electrification strategy.

 

Operational and strategic review

Conditions across our markets were challenging in 2019. Despite this, our financial performance remained robust, supported by a strong order book. A combination of rising energy demand in developing countries and the expansion of renewable energy sources drove orders for flexible power solutions and products such as microgrids, hybrid and gas engines, electrification and energy storage.

 

In 2019 we delivered 6,580 engines (excluding smaller off-highway engines). This compares to 5,976 deliveries in 2018. Our installed base increased to approximately 146,000 engines (from approximately 142,000 in 2018) which will continue to support replacement demand and drive our growing services revenue.

 

Power Systems has a key role to play in our drive towards low carbon power across the Group. A number of technologies that will have applications in civil aerospace markets, notably hybrid, electric, and fuel cells, are already being developed and adopted in Power Systems. Significantly, 2019 marked the last year in which Power Systems sold only fossil fuel based power solutions as we reached several important strategic milestones on this journey, including the signing of customer contracts and framework agreements to implement hybrid engine solutions for the rail sector, where we are first to market, and the yacht market, building on our leadership position with the MTU series engines. We anticipate being first to market in both of these applications. Since October, Power Systems has been operating its own microgrid in Friedrichshafen, which provides over 30% of the energy required for the weekly running of the plant. We successfully received the first orders for our new battery container and microgrid solutions, delivering cleaner and decentralised energy. Together with Lab1886, an innovation lab within the Daimler Group, we started a pilot project to test the use of Mercedes-Benz fuel cell technology for backup power and the supply of energy to data centres. This technology will provide safe, sustainable and emission free energy to one of the world's most significant power consuming industries. Power Systems is also researching more sustainable fuels. During the year, we signed an agreement to construct a demonstration plant to produce synthetic fuels in Brandenburg, Germany.

 

Continuing our push into life-cycle services, we are placing increased focus on digital services and predictive maintenance. Our digital solutions team was expanded during the year and we established a data and analytics competence centre in Munich, Germany. We also expanded our service network for Yachts in La Spezia, Italy. These actions have helped to drive a steady increase in long-term service agreements, including the signing of a 10-year agreement with Svitzer, a global towage and marine services operator.

 

Expanding our geographic footprint is a key driver of our ability to outgrow underlying markets. In 2019 we successfully strengthened our position in China, signing agreements for the delivery of more than 700 MTU engines. These included the largest ever single order of MTU gas gensets to supply over 200 MTU Series 4000s to China's VPower. In India, our Force MTU Power Systems joint venture will begin local assembly of Series 1600 engines in the first half of 2020. This enables us to be closer to our customers and to reduce operating costs. In anticipation of this move we have ceased assembly of MTU Series 1600 engines in Überlingen, Germany.

 

Investing in our people is vital if we are to continue to position ourselves for growth in new markets including hybrid power. To meet our need for increased electrical engineering capability, 100 mechanical engineers undertook a course in electrical engineering as part of a new project at Karlsruhe University.

 

Outlook

As we enter 2020, the early indication is that conditions in a number of our end markets will remain challenging. However, we aim to outperform our markets, driven by our strategy to increase services sales and the shift towards new technologies and integrated solutions. We are also continuing our efforts to gain market share in Asia, where Power Systems has previously been underexposed. As a result, we expect to deliver low single-digit organic revenue growth in 2020 despite this challenging backdrop. We expect margins to improve again in 2020, increasing by 0-100bps as we take another step towards our medium term target of mid-teens. The outbreak of COVID-19 represents a near term macro risk. In 2019, approximately 10% of Power Systems revenues were derived from the greater China region.

 

As part of our ongoing efforts to evaluate our portfolio and create a simpler, more efficient Group, we have taken the decision to carry out a strategic review of Bergen, our medium speed gas and diesel engine business. In 2019 Bergen generated revenues of £239m with an operating loss of £(18)m. From 2020 Bergen will be reported within non-core businesses and has been therefore been excluded from our guidance above.

 

 

Defence

 

Overview

Defence had an excellent year for both order intake and cash flows. Record order intake and a 1.6x book-to-bill ratio helped to drive strong cash flow performance and 26% growth in the order book in 2019. Sales were broadly stable and operating profit margins declined by 110bps, as expected, driven largely by a less profitable OE mix and increased investment in R&D to support a number of major new programme opportunities in the coming years.

 

Financial overview

 

£m

 

2019

 

2018

 

Change

Organic

change

Underlying revenue

3,250

3,124

+4%

+1%

Underlying OE revenue

1,461

1,452

+1%

-2%

Underlying services revenue

1,789

1,672

+7%

+4%

Underlying gross profit

669

690

-3%

-6%

Gross margin %

20.6%

22.1%

-150bps

-160bps

Commercial and administrative

(151)

(170)

-11%

-13%

Restructuring

(7)

(3)

+133%

+133%

Research and development cost

(105)

(100)

+5%

+4%

Joint ventures and associates

9

10

-10%

-10%

Underlying operating profit

415

427

-3%

-7%

Underlying operating margin %

12.8%

13.7%

-90bps

-110bps

 

Underlying revenue

Underlying revenue of £3,250m was up 1% on an organic basis. OE revenue was 2% lower year-on-year driven by fewer deliveries of transport engines due to the phasing of orders, including lower volumes of Trent 700s for Multi-Role Tanker Transport (MRTT) aircraft and AE series engines for the C-130J and V-22. These were partly offset by increased volumes for LiftSystem hardware for the F-35B. Service revenue was up 4%, driven by higher LTSA volume for the AE1107 and AE2100 transport engines, together with increased time and materials (T&M) revenue from EJ200 services.

 

Underlying operating profit

Underlying operating profit of £415m was £28m lower than the prior year, in line with expectations. Gross profit of £669m fell 6%, driven by the lower OE volumes in transport, particularly on the Trent 700 MRTTs, and lower LTSA margins due to the non-repeat of one-off customer settlements in the prior year. 

 

A modest increase in R&D spend of £4m reflected ongoing investment to support future programmes across our Defence portfolio, with a number of attractive growth opportunities in the coming years. C&A costs were £22m lower year-on-year at £(151)m.

 

Operational and strategic review

2019 was a very successful year for Defence, with record order intake, strong operational execution, and the achievement of significant milestones in our ongoing R&D projects which will position the business to grow in the coming years in both transport and combat markets.

 

Our markets remained stable in 2019. The US continues to represent nearly half of the addressable defence spend globally, while the UK and Europe also remain key markets. We expect higher growth in Asia and the Middle East, driven by regional tensions. While the budget backdrop in our markets is relatively stable, we see a number of exciting programme opportunities in the coming years, notably in the Tempest combat programme in the UK and in multiple upcoming campaigns in the US market.

 

Defence had a record order intake of £5.3 billion, driving 26% growth in the order book. Book-to-bill in 2019 was 1.6x, taking the cumulative book-to-bill over the last five years to 1.2x. The strength in 2019 was led by services, highlighting the demand driven by our installed base of over 16,000 engines. Key highlights included a five-year contract worth over $1bn to maintain AE1107 engines for the US Marine Corps, which have now reached the service milestone of over one million flying hours. Two UK Ministry of Defence support contracts were signed; one for Spey naval engines, and one for the maintenance of the EJ200. A multi-year spare parts order was additionally confirmed for our Adour engines in India. OE orders grew, including four Dreadnought power-plants in Submarines and a LiftFan OE order for LRIP 12 of the F-35 programme. We continued to leverage our existing installed base with the Series 3.5 upgrade kit for the T56 engine, which secured further orders from the US Air Force. Fewer than 5% of the C-130 aircraft in service with the US Air Force currently have the Series 3.5 upgrade kit fitted, presenting a significant opportunity for future orders.

 

We delivered 499 aero engines in 2019. In aerospace, three Bombardier Global 6000s, powered by our BR710 engines, were delivered to the German Special Air Mission Wing and German Air Force. LiftSystem production ramped up to meet F-35B programme demand and the Boeing MQ-25 unmanned aerial refuelling tanker, powered by the AE 3007, completed its maiden flight. In maritime, our 50th MT30 gas turbine came off the production line and we delivered key early components for the first Dreadnought submarine.

 

Operationally, our Submarines business implemented a management restructure, reducing complexity and aligning to the needs of the customer. We continued to invest in facilities; the revitalisation of our Indianapolis site is nearing completion while a new 24,000 sqft facility in Walpole, Massachusetts is due to be commissioned in late 2020. These actions to improve efficiency are helping us meet customer demand for cost-effective solutions while minimising the impact on our margins.  

 

R&D investment stepped up in 2019 ahead of a period of important upcoming opportunities. We made good progress as part of Team Tempest, for which we are developing a power and propulsion system which will provide fully integrated power and thermal management. We were also awarded a two-year contract by the UK Ministry of Defence to develop hypersonic propulsion systems. LibertyWorks, our dedicated US defence development unit, successfully demonstrated an integrated power and thermal management system for high-power directed energy applications. We announced an agreement with Bell Helicopter to exclusively develop an optimised propulsion system for the V280 Valor. Over 50,000 hours of engineering analysis, including digital engineering, were devoted to refine our offering for the B-52 re-engining competition and early engine tests were successfully completed in Indianapolis.

 

Outlook

We expect Defence to deliver stable to low-single-digit sales growth in 2020, with stable operating margins. Longer term, supported by the order intake in 2019 and the pipeline of upcoming new programme opportunities, we expect Defence growth to accelerate.   

 

ITP Aero

 

Overview

ITP Aero had a strong year. Underlying revenue grew 21% year-on-year, driven by increases in both aftermarket and OE sales for civil aerospace, both on Trent and non-Rolls-Royce engine programmes. Operating profit increased materially to £111m, reflecting revenue growth and improved pricing. ITP's Aero's 2019 performance also benefitted from a change made to simplify its trading relationship and contractual terms with Civil Aerospace. This change was net neutral at Group level.

 

Financial overview

 

£m

 

 2019

 

2018

 

Change

Organic

change

Underlying revenue

936

779

+20%

+21%

Underlying OE revenue

782

666

+17%

+19%

Underlying services revenue

154

113

+36%

+37%

Underlying gross profit

206

156

+32%

+33%

Gross margin %

22.0%

20.0%

+200bps

+200bps

Commercial and administration costs

(61)

(57)

+7%

+9%

Restructuring

(1)

(2)

-50%

-50%

Research and development costs

(33)

(30)

+10%

+10%

Underlying operating profit

111

67

+66%

+67%

Underlying operating margin

11.9%

8.6%

+330bps

+330bps

 

Underlying revenue

Underlying revenue was £936m, an increase of 21% over 2018. OE growth of 19% was driven by higher engine volumes on civil programmes, with ITP Aero module deliveries up 20% on Trent engine programmes and 40% higher for non-Rolls-Royce programmes. This was partially offset by a reduction in defence sales. Aftermarket revenue increased by 37% due to higher spare parts sales, largely from Rolls-Royce engine programmes. Revenues also benefitted by ~£50m from a change made to simplify ITP Aero's trading relationship and contractual terms with Civil Aerospace. This was net neutral at the Group level.

 

Underlying operating profit

Operating profit increased materially, by 67% to £111m, led by higher gross profit. This increase was driven by higher OE volumes and improved pricing. Profit also benefitted by ~£25m from the change in ITP Aero's trading terms with Civil Aerospace, with a corresponding negative impact in Group eliminations. C&A costs increased by 9% to £(61)m, and R&D rose by 10% to £33m reflecting ongoing investment in aerospace programmes.

 

Operational and strategic review

In November, ITP Aero celebrated its 30th anniversary. The business continued to grow, underpinned by strong positions across a range of large commercial aircraft and business jet platforms. In large commercial we delivered a 20% increase in engine module deliveries for Rolls-Royce widebody programmes and a 40% increase in deliveries to other customers. In business aviation, we continued to see growth through our positions on engine programmes including the PW800 and HTF700.

 

Good progress was made during the year in the expansion of production facilities to meet rising demand for ITP Aero products. Investment included a new Externals facility in Biscay, Spain, focusing on high technology products, and the extension of the Externals facility in Queretaro, Mexico. Both sites are now open and fully operational. In addition to adding new capacity, these facilities will further improve our manufacturing efficiency, driving cost reduction across civil and defence engine programmes.

 

We also achieved important technology milestones in 2019. In June the first aerodynamic tests of the intermediate pressure turbine for UltraFan were successfully carried out. UltraFan will be 25% more efficient than the first generation of Rolls-Royce Trent engines and 10% more efficient than the Trent XWB, the most efficient civil large engine in service globally. Other significant milestones in 2019 included producing the first components designed and manufactured using additive technology. Our new additive manufacturing cell in Zamudio, Spain, manufactured both the low pressure turbine seal segments for the Trent XWB-84 engine and non-structural vanes for the TP400 engine. Additionally, earlier in the year we were certified as only the second provider of servicing globally for the MTR390-E engine for the Tiger helicopter.

 

At the end of the year we strengthened our Board and Management, including the promotion of Carlos Alzola to CEO and ITP Aero board member.

 

Outlook 

We expect continued demand growth on newer, more fuel-efficient engine programmes in both narrowbody and widebody aircraft. We are well placed with strong positions on newer Rolls-Royce Trent engines, as well as the Pratt & Whitney 1000G engines and other non-Rolls-Royce programmes.  Longer term, we have secured participation in technology projects that will contribute significantly to sustainable aviation and efficient digital transformation of production processes. These include the Investigation and Maturation of Technologies for Hybrid Electric Propulsion (IMOTHEP), within the EU's Horizon 2020 framework, which is focused on assessing the potential of hybrid electric propulsion.

 

Following the very strong performance in 2019, we expect to deliver stable sales and margin improvement of 50-100bps in 2020. Longer term the trends outlined above will drive further good growth in profitability and cash flow.

Condensed consolidated income statement

For the year ended 31 December 2019

 

 

 

2019

2018

 

 

 

Notes

£m

£m

Revenue 1

 

 

2

16,587

15,729

Cost of sales 1

 

 

 

(15,645)

(14,531)

Gross profit

 

 

2

942

1,198

Commercial and administrative costs 1

 

 

2

(1,128)

(1,595)

Research and development costs

 

 

3

(770)

(768)

Share of results of joint ventures and associates

 

 

 

104

4

Operating loss

 

 

 

(852)

(1,161)

Gain arising on disposal of businesses 2

 

 

23

139

358

Loss before financing and taxation

 

 

 

(713)

(803)

 

 

 

 

 

 

Financing income

 

 

4

252

271

Financing costs

 

 

4

(430)

(2,415)

Net financing costs

 

 

 

(178)

(2,144)

 

 

 

 

 

 

Loss before taxation

 

 

 

(891)

(2,947)

Taxation

 

 

5

(420)

554

Loss for the year

 

 

 

(1,311)

(2,393)

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

   Ordinary shareholders

 

 

 

(1,315)

(2,401)

   Non-controlling interests

 

 

 

4

8

Loss for the year

 

 

 

(1,311)

(2,393)

Other comprehensive (expense)/income

 

 

 

(1,013)

182

Total comprehensive expense for the year

 

 

 

(2,324)

(2,211)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per ordinary share attributable to ordinary shareholders:

 

 

6

 

 

   Basic

 

 

 

(69.07)p

(129.15)p

   Diluted

 

 

 

(69.07)p

(129.15)p

 

 

 

 

 

 

 

 

 

 

 

 

Payments to ordinary shareholders in respect of the year

 

 

7

 

 

   Pence per share

 

 

 

11.7p

11.7p

   Total

 

 

 

224

220

†   Underlying profit before taxation

 

 

2

583

466

             

1  Included within revenue, cost of sales and commercial and administrative costs are exceptional charges relating to Civil Aerospace programmes, impairment charges and restructuring costs. Further details can be found in note 2.

2  Commercial Marine was disposed of on 1 April 2019 and Rolls-Royce Power Development Limited was disposed of on 15 April 2019. L'Orange was disposed of on 1 June 2018.

†   (Loss)/profit before taxation disclosed on an underlying and statutory basis.

Condensed consolidated statement of comprehensive income

For the year ended 31 December 2019

 

 

 

 

2019

2018

 

 

 

Notes

£m

£m

Loss for the year

 

 

 

(1,311)

(2,393)

Other comprehensive (expense)/income (OCI)

 

 

 

 

 

   Actuarial movements in post-retirement schemes 1

 

 

 

(934)

27

   Share of OCI of joint ventures and associates

 

 

11

(1)

(1)

   Related tax movements

 

 

 

324

(2)

Items that will not be reclassified to profit or loss

 

 

 

(611)

24

 

 

 

 

 

 

   Foreign exchange translation differences on foreign operations

 

 

 

(313)

171

   Reclassified to income statement on disposal of businesses

 

 

23

(98)

(19)

   Cash flow hedge reserve movements

 

 

 

22

(17)

   Share of OCI of joint ventures and associates

 

 

11

(7)

18

   Related tax movements

 

 

 

(6)

5

Items that may be reclassified to profit or loss

 

 

 

(402)

158

 

 

 

 

 

 

Total other comprehensive (expense)/income

 

 

 

(1,013)

182

 

 

 

 

 

 

Total comprehensive expense for the year

 

 

 

(2,324)

(2,211)

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

   Ordinary shareholders

 

 

 

(2,328)

(2,219)

   Non-controlling interests

 

 

 

4

8

Total comprehensive expense for the year

 

 

 

(2,324)

(2,211)

1  Includes an asset re-measurement net loss estimated at £600m following the agreement to transfer the future pension obligations of circa 33,000 pensions in the UK scheme to Legal & General Assurance Society Limited. See note 20 for further information.

 

Condensed consolidated balance sheet

At 31 December 2019

 

 

 

 

 

 

2019

2018

 

Notes

£m

£m

ASSETS

 

 

 

Intangible assets

8

5,442

5,295

Property, plant and equipment

9

4,803

4,929

Right-of-use assets 1

10

2,009

-

Investments - joint ventures and associates

11

402

412

Investments - other

11

14

22

Other financial assets

18

467

343

Deferred tax assets

5

1,887

2,092

Post-retirement scheme surpluses

20

1,170

1,944

Non-current assets

 

16,194

15,037

Inventories

12

4,320

4,287

Trade receivables and other assets

13

5,065

4,690

Contract assets

14

2,095

2,057

Taxation recoverable

 

39

34

Other financial assets

18

86

22

Short-term investments

 

6

6

Cash and cash equivalents

15

4,443

4,974

Current assets

 

16,054

16,070

Assets held for sale

23

18

750

TOTAL ASSETS

 

32,266

31,857

LIABILITIES

 

 

 

Borrowings and lease liabilities

16

(775)

(858)

Other financial liabilities

18

(493)

(647)

Trade payables and other liabilities 

17

(8,450)

(8,292)

Contract liabilities

14

(4,228)

(3,794)

Current tax liabilities

 

(172)

(138)

Provisions for liabilities and charges

19

(858)

(1,122)

Current liabilities

 

(14,976)

(14,851)

Borrowings and lease liabilities

16

(4,910)

(3,804)

Other financial liabilities

18

(3,094)

(3,542)

Trade payables and other liabilities

17

(2,071)

(1,940)

Contract liabilities

14

(6,612)

(5,336)

Deferred tax liabilities

5

(618)

(962)

Provisions for liabilities and charges

19

(1,946)

(795)

Post-retirement scheme deficits

20

(1,378)

(1,303)

Non-current liabilities

 

(20,629)

(17,682)

Liabilities associated with assets held for sale

23

(15)

(376)

TOTAL LIABILITIES

 

(35,620)

(32,909)

 

 

 

 

NET LIABILITIES

 

(3,354)

(1,052)

 

 

 

 

EQUITY

 

 

 

Called-up share capital

 

386

379

Share premium account

 

319

268

Capital redemption reserve

 

159

161

Cash flow hedging reserve

 

(96)

(106)

Merger reserve

 

650

406

Translation reserve

 

397

809

Accumulated losses

 

(5,191)

(2,991)

Equity attributable to ordinary shareholders

 

(3,376)

(1,074)

Non-controlling interests

 

22

22

TOTAL EQUITY

 

(3,354)

(1,052)

1  IFRS 16 Leases has been adopted from 1 January 2019 and under the transitional arrangements the Group has adopted IFRS 16 on a modified retrospective basis. There has been no restatement of 2018 comparatives. See notes 1 and note 25 for more details.

 

 

Condensed consolidated cash flow statement

For the year ended 31 December 2019

 

Notes

2019

£m

2018

£m

Reconciliation of cash flows from operating activities

 

 

 

Operating loss

 

(852)

(1,161)

(Profit)/loss on disposal of property, plant and equipment

 

(13)

11

Share of results of joint ventures and associates

11

(104)

(4)

Dividends received from joint ventures and associates

11

92

105

Amortisation and impairment of intangible assets 2

8

372

565

Depreciation and impairment of property, plant and equipment 2

9

532

521

Depreciation and impairment of right-of-use assets

10

411

-

Impairment of and other movement on investments

11

1

6

Increase in provisions

 

1,108

1,003

Increase in inventories

 

(43)

(616)

Increase in trade receivables and other assets

 

(610)

(469)

Increase in contract assets

 

(41)

(112)

Penalties paid on agreements with investigating bodies

 

(102)

-

Increase in trade payables and other liabilities

 

683

1,732

Increase in contract liabilities

 

1,778

1,419

Cash flows on other financial assets and liabilities held for operating purposes

 

(757)

(732)

Interest received

 

31

-

Net defined benefit post-retirement cost recognised in loss before financing

20

222

352

Cash funding of defined benefit post-retirement schemes

20

(266)

(181)

Share-based payments

 

30

35

Net cash inflow from operating activities before taxation

 

2,472

2,474

Taxation paid

 

(175)

(248)

Net cash inflow from operating activities 1

 

2,297

2,226

 

 

 

 

Cash flows from investing activities

 

 

 

Net movement in unlisted investments

 

3

(6)

Additions of intangible assets

8

(640)

(680)

Disposals of intangible assets

8

13

13

Purchases of property, plant and equipment

 

(747)

(905)

Disposals of property, plant and equipment

 

50

43

Acquisition of businesses

23

(43)

-

Disposal of other businesses

23

453

573

Movement in investments in joint ventures and associates and other movements on investments

 

(8)

(13)

Disposal of joint ventures

 

1

-

Net cash outflow from investing activities

 

(918)

(975)

 

 

 

 

Cash flows from financing activities

 

 

 

Repayment of loans

 

(1,136)

(37)

Proceeds from increase in loans

 

22

1,054

Capital element of lease payments (2018: Capital element of finance lease payments)

 

(271)

(23)

Net cash flow from (decrease)/increase in borrowings and leases

 

(1,385)

994

Interest received

 

-

27

Interest paid

 

(104)

(92)

Interest element of lease payments (2018: Interest element of finance lease payments)

 

(88)

(5)

Increase in short-term investments

 

-

(3)

Issue of ordinary shares (net of expenses)

 

24

1

Purchase of ordinary shares

 

(15)

(1)

Dividends to NCI

 

(4)

(3)

Redemption of C Shares

 

(220)

(216)

Net cash (outflow)/inflow from financing activities

 

(1,792)

702

 

 

 

 

Change in cash and cash equivalents

 

(413)

1,953

Cash and cash equivalents at 1 January

 

4,952

2,933

Exchange (losses)/gains on cash and cash equivalents

 

(104)

66

Cash and cash equivalents at 31 December 3

 

4,435

4,952

1   Operating cash flow includes Trent 1000 insurance receipts of £173m.

2    In 2019, an impairment of £58m in respect of Bergen Engines AS was included in these lines (2018: £160m in respect of Commercial Marine).

3   The Group considers overdrafts (repayable on demand) to be an integral part of its cash management activities and these are included in cash and cash equivalents for the purposes of the cash flow statement.

 

In deriving the consolidated cash flow statement, movements in balance sheet line items have been adjusted for non-cash items.

The cash flow in the year includes the sale of goods and services to joint ventures and associates.

 

 

 

2019

£m

2018

£m

Reconciliation of movements in cash and cash equivalents to movements in net funds/(debt)

 

 

Change in cash and cash equivalents

(413)

1,953

Cash flow from decrease/(increase) in borrowings and leases

1,385

(994)

Cash flow from increase in short-term investments

-

3

Change in net funds resulting from cash flows

972

962

New leases in the year (2018: new finance leases in the year)

(217)

(97)

Net debt (excluding cash and cash equivalents) of previously unconsolidated subsidiary

(1)

-

Exchange (losses)/gains on net funds

(32)

54

Fair value adjustments

48

(69)

Transferred to liabilities associated with assets held for sale

3

-

Movement in net funds

773

850

Net funds/(debt) at 1 January excluding the fair value of swaps

318

(532)

Reclassifications 1

(79)

-

Adoption of IFRS 16 (see note 25)

(2,248)

-

Net debt at 1 January restated

(2,009)

(532)

Net (debt)/funds at 31 December excluding the fair value of swaps

(1,236)

318

Fair value of swaps hedging fixed rate borrowings

243

293

Net (debt)/funds at 31 December

(993)

611

1   In 2019, the Group has reclassified £79m as borrowings previously included in other financial liabilities. These borrowings mature between 2019 and 2029 - see note 16.

The movement in net funds/(debt) (defined by the Group as including the items shown below) is as follows:

 

At 31 December 2018

Transition to IFRS 16 and reclassifications 1

At 1 January

Funds flow

Net funds on acquisition /disposal

Exchange differences

Fair value adjustments

Reclassifications

Other movements on leases

At 31 December

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

2019

 

 

 

 

 

 

 

 

 

 

Cash at bank and in hand

1,023

-

1,023

(179)

-

(19)

-

-

-

825

Money market funds

1,222

-

1,222

(124)

-

(3)

-

-

-

1,095

Short-term deposits

2,729

-

2,729

(124)

-

(82)

-

-

-

2,523

Cash and cash equivalents 2

(per balance sheet)

4,974

-

4,974

(427)

-

(104)

-

-

-

4,443

Overdrafts

(22)

-

(22)

14

-

-

-

-

-

(8)

Cash and cash equivalents

(per cash flow statement)

4,952

-

4,952

(413)

-

(104)

-

-

-

4,435

Short-term investments

6

-

6

-

-

-

-

-

-

6

Other current borrowings

(802)

(14)

(816)

799

-

2

5

(417)

-

(427)

Non-current borrowings

(3,609)

(65)

(3,674)

315

(1)

4

43

417

-

(2,896)

Finance leases

(229)

229

-

-

-

-

-

-

-

-

Lease liabilities

-

(2,477)

(2,477)

271

-

66

-

3

(217)

(2,354)

Financial liabilities

(4,640)

(2,327)

(6,967)

1,385

(1)

72

48

3

(217)

(5,677)

Net funds/(debt) excluding

fair value swaps

318

(2,327)

(2,009)

972

(1)

(32)

48

3

(217)

(1,236)

Fair value of swaps hedging fixed rate borrowings 3

293

-

293

-

-

-

(50)

-

-

243

Net funds/(debt)

611

(2,327)

(1,716)

972

(1)

(32)

(2)

3

(217)

(993)

Net funds (excluding lease liabilities)

840

(79)

761

 

 

 

 

 

 

1,361

2018

 

 

 

 

 

 

 

 

 

 

Cash at bank and in hand

 

 

838

170

-

15

-

-

-

1,023

Money market funds

 

 

589

630

-

3

-

-

-

1,222

Short-term deposits

 

 

1,526

1,155

-

48

-

-

-

2,729

Cash and cash equivalents (per balance sheet)

 

 

2,953

1,955

-

66

-

-

-

4,974

Overdrafts

 

 

(20)

(2)

-

-

-

-

-

(22)

Cash and cash equivalents (per cash flow statement)

 

 

2,933

1,953

-

66

-

-

-

4,952

Short-term investments

 

 

3

3

-

-

-

-

-

6

Other current borrowings

 

 

(39)

(38)

-

(1)

15

(739)

-

(802)

Non-current borrowings

 

 

(3,292)

(972)

-

-

(84)

739

-

(3,609)

Finance leases

 

 

(137)

(81)

-

(11)

-

-

-

(229)

Financial liabilities

 

 

(3,468)

(1,091)

-

(12)

(69)

-

-

(4,640)

Net (debt)/funds excluding

fair value swaps

 

 

(532)

865

-

54

(69)

-

-

318

Fair value of swaps hedging fixed rate borrowings

 

 

227

-

-

-

66

-

-

293

Net (debt)/funds

 

 

(305)

865

-

54

(3)

-

-

611

1 In 2019, the Group has reclassified £79m as borrowings previously included in other financial liabilities. These borrowings mature between 2019 and 2029 - see note 16.

2 Includes Trent 1000 insurance receipts of £173m.

3 All interest rate swaps are entered into for risk management purposes, although these may not be designated into hedging relationships for accounting purposes - see note 16.

 

Condensed consolidated statement of changes in equity

For the year ended 31 December 2019

 

 

 

Attributable to ordinary shareholders

 

 

 

Share capital

Share premium

Capital redemption reserve

Cash flow hedging reserve

Merger reserve

Translation reserve

Accumulated losses 1

Total

Non-controlling interests (NCI)

Total equity

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

At 31 December 2017

368

195

162

(112)

3

657

(343)

930

3

933

   Impact of adopting IFRS 9

-

-

-

-

-

-

(15)

(15)

-

(15)

At 1 January 2018

368

195

162

(112)

3

657

(358)

915

3

918

(Loss)/profit for the year

-

-

-

-

-

(2,401)

(2,401)

8

(2,393)

Foreign exchange translation differences on foreign operations

-

-

-

-

-

171

-

171

-

171

Reclassified to income statement on disposal of L'Orange

-

-

-

-

-

(19)

-

(19)

-

(19)

Movements on post-retirement schemes

-

-

-

-

-

-

27

27

-

27

Debited to cash flow hedge reserve

-

-

-

(17)

-

-

-

(17)

-

(17)

OCI of joint ventures and associates

-

-

-

18

-

-

(1)

17

-

17

Related tax movements

-

-

-

5

-

-

(2)

3

-

3

Total comprehensive income/(expense) for the year

-

-

-

6

-

152

(2,377)

(2,219)

8

(2,211)

Shares issued in respect of acquisition of ITP Aero

10

-

-

-

403

-

-

413

-

413

Other issues of ordinary shares

1

73

-

-

-

-

-

74

-

74

Issue of C Shares 2

-

-

(217)

-

-

-

1

(216)

-

(216)

Redemption of C Shares

-

-

216

-

-

-

(216)

-

-

-

Shares issued to employee share trust

-

-

-

-

-

-

(75)

(75)

-

(75)

Share-based payments - direct to equity 3

-

-

-

-

-

-

32

32

-

32

Transfer of joint operations to subsidiaries

-

-

-

-

-

-

-

-

15

15

Transactions with NCI

-

-

-

-

-

-

-

-

(4)

(4)

Related tax movements

-

-

-

-

-

-

2

2

-

2

Other changes in equity in the year

11

73

(1)

-

403

-

(256)

230

11

241

At 31 December 2018

379

268

161

(106)

406

809

(2,991)

(1,074)

22

(1,052)

Impact of adopting IFRS 16

-

-

-

-

-

-

(40)

(40)

-

(40)

At 1 January 2019

379

268

161

(106)

406

809

(3,031)

(1,114)

22

(1,092)

(Loss)/profit for the year

-

-

-

-

-

-

(1,315)

(1,315)

4

(1,311)

Foreign exchange translation differences on foreign operations

-

-

-

-

-

(313)

-

(313)

-

(313)

Reclassified to income statement on disposal of Commercial Marine

-

-

-

-

-

(98)

-

(98)

-

(98)

Movements on post-retirement schemes

-

-

-

-

-

-

(934)

(934)

-

(934)

Credited to cash flow hedge reserve

-

-

-

22

-

-

-

22

-

22

OCI of joint ventures and associates

-

-

-

(7)

-

-

(1)

(8)

-

(8)

Related tax movements

-

-

-

(5)

-

(1)

324

318

-

318

Total comprehensive income/(expense) for the year)

-

-

-

10

-

(412)

(1,926)

(2,328)

4

(2,324)

Arising on issues of ordinary shares

1

51

-

-

-

-

-

52

-

52

Shares issued in respect of acquisition of ITP Aero

6

-

-

-

244

-

-

250

-

250

Issue of C Shares 2

-

-

(222)

-

-

-

1

(221)

-

(221)

Redemption of C Shares

-

-

220

-

-

-

(220)

-

-

-

Ordinary shares purchased

-

-

-

-

-

-

(15)

(15)

-

(15)

Shares issued to employee share trust

-

-

-

-

-

-

(51)

(51)

-

(51)

Share-based payments - direct to equity 3

-

-

-

-

-

-

50

50

-

50

Transactions with NCI

-

-

-

-

-

-

-

-

(4)

(4)

Related tax movements

-

-

-

-

-

-

1

1

-

1

Other changes in equity in the year

7

51

(2)

-

244

-

(234)

66

(4)

62

At 31 December 2019

386

319

159

(96)

650

397

(5,191)

(3,376)

22

(3,354)

1   At 31 December 2019, 12,476,576 ordinary shares with a net book value of £108m (2018: 13,538,921, 2017: 6,466,153 ordinary shares with net book values of £123m and £52m respectively) were held for the purpose of share-based payment plans and included in accumulated losses. During the year, 8,984,219 ordinary shares with a net book value of £82m (2018: 468,165 shares with a net book value of £4m) vested in share-based payment plans. During the year, the Company acquired 118,831 (2018: 80,810) of its ordinary shares via reinvestment of dividends received on its own shares and purchased 1,673,143 (2018: nil) of its ordinary shares through purchases on the London Stock Exchange. During the year, the Company issued 28,973,262 new ordinary shares relating to the remaining three instalments for the acquisition of ITP Aero (2018: 47,556,914 new ordinary shares relating to the first five instalments) and 7,803,043 new ordinary shares (2018: 7,460,173) to the Group's share trust for its employee share-based payment plans with a net book value of £66m (2018: £74m).

2  In Rolls-Royce Holdings plc's Company Financial Statements, C Shares are issued from the merger reserve, this reserve was created by a scheme of arrangement in 2011. As this reserve is eliminated on consolidation, in the Consolidated Financial Statements, the C Shares are shown as being issued from the capital redemption reserve.

3  Share-based payments - direct to equity is the share-based payment charge for the year less the actual cost of vesting excluding those vesting from own shares and cash received on share-based schemes vesting.

 

 

1   Basis of preparation and accounting policies

The Company

Rolls-Royce Holdings plc (the 'Company') is a public company incorporated under the Companies Act 2006 and domiciled in the United Kingdom. The condensed consolidated financial statements of the Company for the year ended 31 December 2019 consist of the consolidation of the Financial Statements of the Company and its subsidiaries (together referred to as the Group) and include the Group's interest in jointly controlled and associated entities.

The consolidated financial statements of the Group as at and for the year ended 31 December 2019 (2019 Annual Report) are available upon request from the Company Secretary, Rolls---‑Royce Holdings plc, Kings Place, 90 York Way, London, N1 9FX.

Statement of compliance

These condensed Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in the EU. They do not include all of the information required for full annual statements, and should be read in conjunction with the 2019 Annual Report. 

The comparative figures for the financial year 31 December 2018 are not the Group's statutory accounts for that financial year. Those accounts have been reported on by the Group's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The Board of directors approved the condensed consolidated financial statements on 28 February 2020.

Significant accounting policies

Except for the adoption of IFRS 16 Leases and IFRIC 23 Uncertainty over Income Tax Treatment, the accounting policies applied by the Group in these condensed Consolidated Financial Statements are the same as those that were applied to the Consolidated Financial Statements of the Group for the year ended 31 December 2018 (International Financial Reporting Standards issued by the International Accounting Standards Board (IASB), as adopted for use in the EU effective at 31 December 2018).

IFRS 16 Leases

The Group adopted IFRS 16 on 1 January 2019 using the modified retrospective approach. Under the specific transitional provisions in the standard, comparative information has not been restated. The reclassifications and the adjustments arising from the new leasing rules have been recognised in the opening balance sheet on 1 January 2019 (see note 25).

Until 31 December 2018, leases of aircraft and engines, plant and equipment and land and buildings were classified as either finance or operating leases. Payments made under operating leases were charged to profit or loss on a straight-line basis over the period of the lease.  From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between reducing the liability and a finance cost. The finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

On adoption of IFRS 16, the Group recognised additional lease liabilities in relation to leases which had previously been classified as 'operating leases' under the previous principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate as of 1 January 2019. The weighted average incremental borrowing rate applied by the Group to the lease liabilities on 1 January 2019 was 3.7%.

The associated right-of-use assets for certain high value property leases are measured on a retrospective basis as if the new rules had always been applied. As above, the Group's incremental borrowing rate has been used. Other right-of-use assets are measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018.

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

-     on initial application, IFRS 16 was only applied to contracts that were previously classified as leases, the Group has elected not to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group has relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease;

-     lease contracts with a duration of less than 12 months will continue to be expensed to the income statement on a straight-line basis over the lease term;

-     the lease term has been determined with the use of hindsight where the contract contains options to extend the lease; and

-     reliance on previous assessments on whether or not leases are onerous.

Note 25 sets out the adjustments made on transition to IFRS 16 Leases on 1 January 2019. The most significant changes are where the Group is a lessee as the standard has not significantly changed the accounting where the Group is a lessor in a lease arrangement.

Accounting policy

Key judgement - Determining the lease term

In determining the lease term, the Group considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). Certain land and building leases have renewal options with renewal dates for the most significant property leases evenly spread between 2022-2028 and in 2041. The Group reviews its judgements on lease terms annually, including the operational significance of the site, especially where utilised for manufacturing activities.

Key estimate - Estimates of the payments required to meet residual value guarantees at the end of engine leases

Engine leases in the Civil Aerospace segment often include clauses that guarantee engine value when returned to the lessor. This is in the form of additional payments to the lessor if the measured useful life of the engine is below levels specified in the contracts. The estimated cost of meeting these obligations are included in the lease payments. The amount payable is calculated based upon an estimate of the utilisation of the engines over the lease term that would determine the cash payable to the lessor and whether engine life can be restored at a lower estimated cost by performing an overhaul prior to the end of the lease. At 31 December 2019, the lease liability included £401m relating to the cost of meeting these residual value guarantees, with up to £80m in 2020 and £112m due over the following four years. Where estimates of payments change an adjustment is made to the lease liability and the right-of-use asset.

 

 

1   Basis of preparation and accounting policies continued

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

-     fixed payments less any lease incentive receivable;

-     variable lease payments that are based on an index or a rate;

-     amounts expected to be payable by the Group under residual value guarantees;

-     the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and

-     payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.

Where leases commence after the initial transition date, the lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the Group's incremental borrowing rate is used, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Lease liabilities are revalued at each reporting date using the spot exchange rate.

Right-of-use assets are measured at cost comprising the following:

-     the amount of the initial measurement of lease liability or a revaluation of the liability;

-     any lease payments made at or before the commencement date less any lease incentives received;

-     any initial direct costs; and

-     restoration costs.

Each right-of-use asset is depreciated over the shorter of its useful economic life and the lease term on a straight-line basis unless the lease is expected to transfer ownership of the underlying asset to the Group, in which case the asset is depreciated to the end of the useful life of the asset. 

Payments associated with short-term leases are recognised on a straight-line basis as an expense in the income statement. Short-term leases are leases with a lease term of 12 months or less.

IFRIC 23 Uncertainty over Income Tax Treatment

The Group adopted IFRIC 23 on 1 January 2019. The interpretation clarifies how to apply the recognition and measurement requirements in

IAS 12 Income Taxes when there is uncertainty over income tax treatments. Adoption of this interpretation did not have a material impact on the Group's financial statements.

Post balance sheet events

Non-adjusting post balance sheet events in relation to pensions and mergers and acquisitions activity is disclosed in notes 20 and 23 respectively.

2   Analysis by business segment

The analysis by divisions (business segment) is presented in accordance with IFRS 8 Operating Segments, on the basis of those segments whose operating results are regularly reviewed by the Board (who act as the Chief Operating Decision Maker as defined by IFRS 8). Our four divisions are set out below and referred to collectively as the core businesses.

Civil Aerospace

-   development, manufacture, marketing and sales of commercial aero engines and aftermarket services

Power Systems

-   development, manufacture, marketing and sales of reciprocating engines, power systems and nuclear systems for civil power generation

Defence

-   development, manufacture, marketing and sales of military aero engines, naval engines, submarines nuclear power plants and aftermarket services

ITP Aero

-   design, research and development, manufacture and casting, assembly and test of aeronautical engines and gas turbines, and MRO services

Non-core businesses include the trading results of the North America Civil Nuclear business and the Knowledge Management System business which have been treated as a disposal group held for sale at 31 December 2019, the Commercial Marine business until the date of disposal on 1 April 2019, Rolls-Royce Power Development Limited (RRPD) until the date of disposal on 15 April 2019, L'Orange until the date of disposal on 1 June 2018 and other smaller businesses including former Energy businesses not included in the disposal to Siemens on 2014 (Retained Energy). Segmental analysis for 2018 has been restated to reflect the 2019 definition of non-core.

Underlying results 

We present the financial performance of our business in accordance with IFRS 8 and consistently with the basis on which performance is communicated to the Board each month. Underlying results are presented to reflect the economic impact of the Group's foreign exchange and interest rate risk management activities with interest receivable/(payable) on interest rate swaps not designated into hedging relationships for accounting purposes reclassified from fair value movement on a reported basis to interest receivable/(payable) on an underlying basis - see note 4.

Underlying performance excludes the following:

-     the effect of acquisition accounting and business disposals;

-     impairment of goodwill and other non-current assets where the reasons for impairment are outside of normal operating activities;

-     exceptional items; and

-     other items which are market driven and outside the control of management.

Acquisition accounting, business disposals and impairment

We exclude these so that the current year and comparative results are directly comparable.

Exceptional items

We classify items as 'exceptional' where the Directors believe that presentation of our results in this way is more relevant to an understanding of our financial performance, as exceptional items are identified by virtue of their size, nature or incidence.

In determining whether an event or transaction is exceptional, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. Examples of exceptional items include one-time costs and charges in respect of aerospace programmes, costs of restructuring programmes and one-time past-service charges and credits on our post-retirement schemes.

In 2019, the risk-free discount rate we applied to exceptional onerous contract provisions reduced from between 4%-5% to 2%-3%. This

was largely driven by movements in US bonds in the last quarter of 2019. The change in the risk-free rate (US bonds) is market driven

and the impact of the reduction in the rate has been included as a reconciling difference between underlying performance and headline performance.

Exceptional items are not allocated to segments and may not be comparable to similarly titled measures used by other companies.

2   Analysis by business segment continued

Other items

The financing component of the defined benefit pension scheme cost is determined by market conditions and has therefore been included as a reconciling difference between underlying performance and headline performance.

Penalties paid on agreements with investigating bodies are considered to be one-off in nature and are therefore excluded from

underlying performance.

The tax effects of the adjustments above are excluded from the underlying tax charge. In addition, changes in tax rates and changes in the amount of recoverable advance corporation tax recognised are also excluded.

See page 36 for the reconciliation between Underlying performance and Reported performance.

The following analysis sets out the results of the core businesses on the basis described above and also includes a reconciliation of the underlying results to those reported in the consolidated income statement.

 

Civil Aerospace  

Power        Systems 1

Defence

ITP Aero

Corporate and inter-segment

Core businesses

 

£m

£m

£m

£m

£m

£m

Year ended 31 December 2019

 

 

 

 

 

 

Underlying revenue from sale of original equipment

3,246

2,386

1,461

782

(502)

7,373

Underlying revenue from aftermarket services

4,861

1,159

1,789

154

(75)

7,888

Total underlying revenue

8,107

3,545

3,250

936

(577)

15,261

Gross profit/(loss)

622

909

669

206

(64)

2,342

Commercial and administrative costs

(299)

(374)

(151)

(61)

(53)

(938)

Restructuring

(7)

-

(7)

(1)

-

(15)

Research and development costs

(374)

(176)

(105)

(33)

-

(688)

Share of results of joint ventures and associates

102

(2)

9

-

-

109

Underlying operating profit/(loss)

44

357

415

111

(117)

810

 

 

 

 

 

 

 

Segment assets

17,954

3,587

2,743

2,160

(2,476)

23,968

Interests in joint ventures and associates

365

18

19

-

-

402

Segment liabilities

(24,819)

(1,450)

(2,950)

(1,129)

2,645

(27,703)

Net (liabilities)/assets

(6,500)

2,155

(188)

1,031

169

(3,333)

 

 

 

 

 

 

 

Year ended 31 December 2018

 

 

 

 

 

 

Underlying revenue from sale of original equipment

3,119

2,310

1,452

666

(375)

7,172

Underlying revenue from aftermarket services

4,259

1,124

1,672

113

(54)

7,114

Total underlying revenue

7,378

3,434

3,124

779

(429)

14,286

Gross profit

493

866

690

156

35

2,240

Commercial and administrative costs

(336)

(363)

(170)

(57)

(51)

(977)

Restructuring

(8)

(1)

(3)

(2)

-

(14)

Research and development costs

(332)

(188)

(100)

(30)

-

(650)

Share of results of joint ventures and associates

21

1

10

-

-

32

Underlying operating (loss)/profit

(162)

315

427

67

(16)

631

 

 

 

 

 

 

 

Segment assets

14,271

3,692

2,612

2,210

(1,621)

21,164

Interests in joint ventures and associates

380

14

16

-

-

410

Segment liabilities

(21,309)

(1,651)

(2,924)

(1,168)

1,743

(25,309)

Net (liabilities)/assets

(6,658)

2,055

(296)

1,042

122

(3,735)

1 The underlying results for Power Systems for 31 December 2018 have been restated to reclassify the North America Civil Nuclear business as non-core.

 

2   Analysis by business segment continued

Reconciliation to reported results

Core businesses

Non-core businesses 1,2

Total underlying

Underlying adjustments and adjustments to foreign exchange

Group at actual exchange rates

 

£m

£m

£m

£m

£m

Year ended 31 December 2019

 

 

 

 

 

Revenue from sale of original equipment

7,373

83

7,456

596

8,052

Revenue from aftermarket services

7,888

106

7,994

541

8,535

Total revenue

15,261

189

15,450

1,137

16,587

Gross profit/(loss)

2,342

45

2,387

(1,445)

942

Commercial and administrative costs

(938)

(41)

(979)

(149)

(1,128)

Restructuring

(15)

1

(14)

14

-

Research and development costs

(688)

(8)

(696)

(74)

(770)

Share of results of joint ventures and associates

109

1

110

(6)

104

Operating profit/(loss)

810

(2)

808

(1,660)

(852)

Gain arising on the disposal of businesses

-

-

-

139

139

Profit/(loss) before financing and taxation

810

(2)

808

(1,521)

(713)

Net financing

(223)

(2)

(225)

47

(178)

Profit/(loss) before taxation

587

(4)

583

(1,474)

(891)

Taxation

(281)

4

(277)

(143)

(420)

Profit/(loss) for the year

306

-

306

(1,617)

(1,311)

Attributable to:

 

 

 

 

 

Ordinary shareholders

 

 

302

(1,617)

(1,315)

Non-controlling interests

 

 

4

-

4

 

 

 

 

 

 

Year ended 31 December 2018

 

 

 

 

 

Revenue from sale of original equipment

7,172

358

7,530

285

7,815

Revenue from aftermarket services

7,114

423

7,537

377

7,914

Total revenue

14,286

781

15,067

662

15,729

Gross profit/(loss)

2,240

210

2,450

(1,252)

1,198

Commercial and administrative costs

(977)

(184)

(1,161)

(434)

(1,595)

Restructuring

(14)

(2)

(16)

16

-

Research and development costs

(650)

(39)

(689)

(79)

(768)

Share of results of joint ventures and associates

32

-

32

(28)

4

Operating profit/(loss)

631

(15)

616

(1,777)

(1,161)

Gain arising on the disposal of L'Orange

-

-

-

358

358

Profit/(loss) before financing and taxation

631

(15)

616

(1,419)

(803)

Net financing

(148)

(2)

(150)

(1,994)

(2,144)

Profit/(loss) before taxation

483

(17)

466

(3,413)

(2,947)

Taxation

(153)

(8)

(161)

715

554

Profit/(loss) for the year

330

(25)

305

(2,698)

(2,393)

Attributable to:

 

 

 

 

 

Ordinary shareholders

 

 

297

(2,698)

(2,401)

Non-controlling interests

 

 

8

-

8

     Includes the North America Civil Nuclear business and the Knowledge Management System business which have been treated as a disposal group held for sale at 31 December 2019, the Commercial Marine business disposed of on the 1 April 2019, RRPD disposed of on the 15 April 2019, L'Orange until the date of disposal on 1 June 2018 and other smaller non-core businesses including former Energy businesses not included in the disposal to Siemens in 2014 (Retained Energy). See note 23 for more details.

2 Non-core businesses for 31 December 2018 has been restated to include the North America Civil Nuclear business.

2   Analysis by business segment continued

Disaggregation of revenue from contracts with customers

Analysis by type and basis of recognition

 

 

Civil Aerospace

Power Systems 1

Defence

ITP Aero 2

Corporate and inter-segment

Core businesses

 

 

£m

£m

£m

£m

£m

£m

Year ended 31 December 2019

 

 

 

 

 

 

 

Original equipment recognised at a point in time

 

3,246

2,285

567

702

(478)

6,322

Original equipment recognised over time

 

-

101

894

80

(24)

1,051

Aftermarket services recognised at a point in time

 

1,599

1,026

696

48

(32)

3,337

Aftermarket services recognised over time

 

3,138

133

1,093

106

(43)

4,427

Total underlying customer contract revenue 3

 

7,983

3,545

3,250

936

(577)

15,137

Other underlying revenue

 

124

-

-

-

-

124

Total underlying revenue

 

8,107

3,545

3,250

936

(577)

15,261

 

 

 

 

 

 

 

 

Year ended 31 December 2018

 

 

 

 

 

 

 

Original equipment recognised at a point in time

 

3,119

2,257

694

585

(355)

6,300

Original equipment recognised over time

 

-

53

758

81

(20)

872

Aftermarket services recognised at a point in time

 

1,575

996

718

(4)

21

3,306

Aftermarket services recognised over time

 

2,630

128

954

117

(75)

3,754

Total underlying customer contract revenue 3

 

7,324

3,434

3,124

779

(429)

14,232

Other underlying revenue

 

54

-

-

-

-

54

Total underlying revenue

 

7,378

3,434

3,124

779

(429)

14,286

1 The underlying revenue for Power Systems for 31 December 2018 has been represented to reclassify the North America Civil Nuclear business as non-core.

2 ITP Aero prior year disaggregation of revenue restated to be consistent with current year presentation.

3 Includes £(93)m (2018: £(196)m) of revenue recognised in the year relating to performance obligations satisfied in previous years - see note 14.

 

Core businesses

Non-core businesses 1,2

Total underlying

Underlying adjustments and adjustments to foreign exchange 3

Group results at actual exchange rates

 

£m

£m

£m

£m

£m

Year ended 31 December 2019

 

 

 

 

 

Original equipment recognised at a point in time

6,322

40

6,362

596

6,958

Original equipment recognised over time

1,051

43

1,094

-

1,094

Aftermarket services recognised at a point in time

3,337

94

3,431

313

3,744

Aftermarket services recognised over time

4,427

12

4,439

228

4,667

Total customer contract revenue

15,137

189

15,326

1,137

16,463

Other revenue

124

-

124

-

124

Total revenue

15,261

189

15,450

1,137

16,587

 

 

 

 

 

 

Year ended 31 December 2018

 

 

 

 

 

Original equipment recognised at a point in time

6,300

64

6,364

283

6,647

Original equipment recognised over time

872

294

1,166

2

1,168

Aftermarket services recognised at a point in time

3,306

388

3,694

148

3,842

Aftermarket services recognised over time

3,754

35

3,789

229

4,018

Total customer contract revenue

14,232

781

15,013

662

15,675

Other revenue

54

-

54

-

54

Total revenue

14,286

781

15,067

662

15,729

1 Includes the North America Civil Nuclear business and the Knowledge Management System business which have been treated as a disposal group held for sale at 31 December 2019, the Commercial Marine business disposed of on the 1 April 2019, RRPD disposed of on the 15 April 2019, L'Orange until the date of disposal on 1 June 2018 and other smaller non-core businesses including former Energy businesses not included in the disposal to Siemens in 2014 (Retained Energy). See note 23 for more details.

2 Non-core businesses for 31 December 2018 has been restated to include North America Civil Nuclear business.

3 Includes £(187)m (2018: £nil) of revenue recognised relating to performance obligations satisfied in previous years over and above that in underlying revenue.

Order backlog

Contracted consideration that is expected to be recognised as revenue when performance obligations are satisfied in the future (referred to as order backlog) is as follows:

 

2019

 

2018

 

Within

five years

After

five years

 

Total

 

Within

five years

After

 five years

Total

 

 

£bn

£bn

£bn

 

£bn

£bn

£bn

 

Civil Aerospace

22.9

25.6

48.5

 

22.1

30.2

52.3

 

Power Systems

2.6

0.3

2.9

 

2.9

0.2

3.1

 

Defence

7.7

0.9

8.6

 

6.3

0.5

6.8

 

ITP Aero

0.7

0.2

0.9

 

0.8

0.1

0.9

 

 

33.9

27.0

60.9

 

32.1

31.0

63.1

 

                   

The parties to these contracts have approved the contract and our customers do not have a unilateral enforceable right to terminate the contract without compensation. We exclude Civil Aerospace OE orders (for deliveries beyond the next 7-12 months) that our customers have placed where they retain a right to cancel. Our expectation based on historical experience is that these orders will be fulfilled. Within the 0-5 years category, contracted revenue in: Defence will largely be recognised in the next three years; Power Systems will be recognised over the next two years as it is a short cycle business; and ITP Aero (where internal Group revenues have been eliminated) evenly spread over the next five years.

2   Analysis by business segment continued

Underlying adjustments

 

2019

 

2018

 

Revenue

£m

Profit before financing

£m

Net financing

£m

 

Revenue

£m

Profit before financing

£m

Net financing

£m

Underlying performance

15,450

808

(225)

 

15,067

616

(150)

Transactions recognised at exchange rate on date of cash flow and revaluation of trading assets / liabilities 1

1,137

145

80

 

781

(23)

163

Impact of unrealised fair value changes to derivative contracts held for trading 2

-

(1)

(6)

 

-

(1)

(2,144)

Impact of unrealised fair value changes to derivative contracts held for financing 3

-

-

1

 

-

-

(3)

Exceptional programme charges 4,5

-

(1,409)

-

 

(119)

(976)

(15)

Impact of discount rate changes 6

-

-

(40)

 

-

-

-

Exceptional restructuring charges 4,7

-

(136)

-

 

-

(317)

-

(Loss)/gains arising on the acquisitions and disposals 8

-

(24)

(8)

 

-

183

(8)

Impairments and asset write-offs 9

-

(84)

-

 

-

(155)

-

Other 10

-

(12)

20

 

-

(130)

13

Total underlying adjustments

1,137

(1,521)

47

 

662

(1,419)

(1,994)

Reported per consolidated income statement

16,587

(713)

(178)

 

15,729

(803)

(2,144)

1   The adjustments for realised gains/(losses) on settled derivative contracts include adjustments to reflect the gains/(losses) in the same period as the related trading cash flows.

2   The adjustments for unrealised fair value changes to derivative contracts include those included in equity accounted joint ventures and exclude those for which the related trading contracts have been cancelled when the fair value changes are recognised immediately in underlying profit before taxation.

3   Includes the losses on hedge ineffectiveness in the period of £13m (2018: losses £3m)

4   The table below summarises the exceptional items recorded in 2019 and 2018.

 

Year to 31 December

 

2019

2018

 

£m

£m

Programme charges and associated contract losses 5

1,409

976

Related foreign exchange impact 5

171

147

Restructuring charges 7

136

317

Pension charges 10

-

121

 

1,716

1,561

5   Included within programme exceptional items is £1,361m (2018: £790m), £1,531m (2018: £905m) at prevailing exchange rates, in respect of the abnormal wastage costs on the Trent 1000. This includes £0.2bn of insurance receipts in respect of the Trent 1000 in-service issues. In addition, there is an exceptional item of £48m (2018: £186m), £49m (2018: £218m) at prevailing exchange rates that relates to the decision by Airbus to cease A380 deliveries in 2021. For information on the associated provisions - see note 19.

6   Included within discount rate changes is £30m relating to Trent 900 and £10m relating to Trent 1000 for the impact from the change in discount rates on contract losses recorded in exceptional items in prior years as a result of the fall in US bonds, which drives the calculation of the risk-free rate.                 

7  The Group recorded an exceptional restructuring charge of £136m (2018: £317m) in the year. The costs include: £88m (2018: £223m) in respect of the Group-wide restructuring programme announced on 14 June 2018; costs relating to ongoing multi-year significant restructuring programmes including restructuring at Power Systems and in respect of Defence, reflecting actions to remove cost and improve operational efficiency.                               

8  (Loss)/gains arising on the acquisitions and disposals of businesses. See note 23 for more details.                                   

9  In 2019, there has been an impairment of £58m relating to Bergen Engines AS, and impairment charge and asset write offs of £26m following the announcement to sell the North America Civil Nuclear business within the Power Systems business segment. The impairment charge in 2018 of £155m related to Commercial Marine.

10      Other includes the 2018 cost of equalisation of pension benefits between men and women.                                                                                                              

Appropriate rates of tax have been applied to adjustments made to profit before tax in the table above. Adjustments in 2019 which impact the UK tax loss have an effective tax rate of zero. See note 5 for more details. The total underlying adjustments to profit before tax in 2019 are a charge of £143m (2018: credit £715m). The charge in 2019 was £57m plus an additional charge of £86m relating to the derecognition of UK deferred tax assets on foreign exchange and commodity financial assets and liabilities. The credit in 2018 was £672m plus an additional credit of £43m relating to the reduction in the Spanish Basque region tax rate.

Group employees monthly average during the year

 

2019

2018

Civil Aerospace

26,100

25,500

Power Systems

10,400

10,500

Defence

9,900

10,500

ITP Aero

3,900

3,700

Corporate 1

100

100

Core businesses

50,400

50,300

Non-core business 2

1,300

4,200

1   Corporate consists of employees who do not provide a shared service to the business segments. Where corporate functions provide such a service, employees have been allocated to the business segments on an appropriate basis.

2   Includes the North America Civil Nuclear business (disposal group held for sale), Commercial Marine (disposed of on 1 April 2019), RRPD (disposed of on 15 April 2019), L'Orange (disposed of on 1 June 2018) and Retained Energy. See note 23 for more details.

 

 

 

 

2   Analysis by business segment continued

Reconciliation to the balance sheet

 

 

 

 

 

2019

2018

 

 

 

 

 

£m

£m

Reportable segment assets

 

 

 

 

23,968

21,164

Interests in joint ventures and associates

 

 

 

 

402

412

Non-core businesses

 

 

 

 

84

188

Assets held for sale

 

 

 

 

18

750

Cash and cash equivalents and short-term investments

 

 

 

 

4,449

4,980

Fair value of swaps hedging fixed rate borrowings

 

 

 

 

249

293

Deferred and income tax assets

 

 

 

 

1,926

2,126

Post-retirement scheme surpluses

 

 

 

 

1,170

1,944

Total assets

 

 

 

 

32,266

31,857

Reportable segment liabilities

 

 

 

 

(27,703)

(25,309)

Non-core businesses

 

 

 

 

(43)

(159)

Liabilities associated with assets held for sale

 

 

 

 

(15)

(376)

Borrowings and lease liabilities

 

 

 

 

(5,685)

(4,662)

Fair value of swaps hedging fixed rate borrowings

 

 

 

 

(6)

-

Deferred and income tax liabilities

 

 

 

 

(790)

(1,100)

Post-retirement scheme deficits

 

 

 

 

(1,378)

(1,303)

Total liabilities

 

 

 

 

(35,620)

(32,909)

Net liabilities

 

 

 

 

(3,354)

(1,052)

3   Research and development

 

2019

2018

 

£m

£m

Expenditure in the year

(1,118)

(1,145)

Capitalised as intangible assets

481

498

Amortisation and impairment of capitalised costs 1

(133)

(121)

Net cost recognised in the income statement

(770)

(768)

Underlying adjustments relating to the effects of acquisition accounting and foreign exchange

74

79

Net underlying cost recognised in the income statement

(696)

(689)

1   See note 8 for analysis of amortisation and impairment. 

4   Net financing

 

2019

2018

 

Per consolidated income statement

Underlying financing 1

Per consolidated income statement

Underlying financing 1

 

£m

£m

£m

£m

Interest receivable

31

31

27

27

Net fair value gains on non-hedge accounted interest rate swaps 2

14

-

-

-

Financial RRSAs - foreign exchange differences and changes in forecast payments

11

-

25

-

Net fair value gains on commodity contracts

36

-

-

-

Financing on post-retirement scheme surpluses

60

-

56

-

Net foreign exchange gains

100

-

163

-

Financing income

252

31

271

27

 

 

 

 

 

Interest payable

(182)

(163)

(107)

(99)

Net fair value losses on foreign currency contracts

(43)

-

(2,122)

-

Financial RRSAs - foreign exchange differences and changes in forecast payments

(10)

-

(27)

-

Financial charge relating to financial RRSAs

(3)

(3)

(8)

(8)

Net fair value losses on commodity contracts

-

-

(22)

-

Financing on post-retirement scheme deficits

(37)

-

(33)

-

Other financing charges

(155)

(90)

(96)

(70)

Financing costs 

(430)

(256)

(2,415)

(177)

 

 

 

 

 

Net financing costs

(178)

(225)

(2,144)

(150)

 

 

 

 

 

Analysed as:

 

 

 

 

   Net interest payable

(151)

(132)

(80)

(72)

   Net fair value (losses)/gains on derivative contracts

7

-

(2,144)

-

   Net post-retirement scheme financing

23

-

23

-

   Net other financing

(57)

(93)

57

(78)

Net financing costs

(178)

(225)

(2,144)

(150)

           

1   See note 2 for definition of underlying results.

2 The condensed consolidated income statement shows the net fair value gain on any interest rate swaps not designated into hedging relationships for accounting purposes. Underlying financing reclassifies the interest receivable on these interest rates swaps from fair value movement to interest receivable.

 

5   Taxation

 

UK

 

Overseas

 

Total

 

 

2019

£m

2018

£m

 

2019

£m

2018

£m

 

2019

£m

2018

£m

Current tax charge for the year

15

13

 

228

167

 

243

180

Adjustments in respect of prior years

(4)

(13)

 

(3)

15

 

(7)

2

Current tax

11

-

 

225

182

 

236

182

 

 

 

 

 

 

 

 

 

Deferred tax charge/(credit) for the year

117

(630)

 

(24)

(43)

 

93

(673)

Adjustments in respect of prior years

20

22

 

(15)

(42)

 

5

(20)

Derecognition of deferred tax

86

-

 

-

-

 

86

-

Deferred tax credit resulting from reduction in tax rates

-

-

 

-

(43)

 

-

(43)

Deferred tax

223

(608)

 

(39)

(128)

 

184

(736)

 

 

 

 

 

 

 

 

 

Charged/(credited) in the income statement

234

(608)

 

186

54

 

420

(554)

                       

 

Deferred taxation assets and liabilities

 

2019

2018

 

£m

£m

At 1 January

1,130

380

Impact of adopting of IFRS 16 (2018: Impact of adopting IFRS 9)

8

2

Amount (charged)/credited to income statement

(184)

736

Amount credited/(charged) to other comprehensive income

323

(2)

Amount (charged)/credited to cash flow hedge reserve

(5)

5

Amount credited to equity

1

2

On disposal/acquisition of businesses 1

(3)

6

Transferred to assets held for sale 2

(2)

(4)

Exchange differences

1

5

At 31 December

1,269

1,130

Deferred tax assets

1,887

2,092

Deferred tax liabilities

(618)

(962)

 

1,269

1,130

1   The 2019 deferred tax on disposal of businesses relates to Commercial Marine. The 2018 comparative relates to the disposal of L'Orange.

2 The 2019 deferred tax transferred to assets held for sale relates to the North America Civil Nuclear business. The 2018 comparative relates to Commercial Marine.

Deferred tax assets of £1,887m include £1,010m (2018: £998m) relating to tax losses in the UK and £163m (2018: £163m) relating to Advance Corporation Tax (ACT). These assets have been recognised based on the expectation that the UK business will generate taxable profits and tax liabilities in the future against which the losses and ACT can be utilised.

Most of the tax losses relate to the Group's Civil Aerospace widebody business in the UK which makes initial losses through the investment

period of a programme and then makes a profit through its contracts for services. The programme lifecycles typically range between 30 and 55 years with more of the widebody engine programmes forecast at the upper end of that range. In the past few years there have been four new engines that have entered into service (Trent 1000-TEN, Trent 7000, Trent XWB-84 and Trent XWB-97), all of which are still in the investment stage.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets

can be utilised. A recoverability assessment has been undertaken, taking account of deferred tax liabilities against which the reversal can be offset and using latest UK forecasts, which are mainly driven by the Group's Civil Aerospace widebody business, to assess the level of future taxable profits.

The recoverability of UK deferred tax assets relating to UK tax losses and ACT has been assessed in 2019 on the following basis:

-     using the most recent UK profit forecasts prepared by management, which are consistent with past experience and external sources on market conditions. These forecasts cover the next five years;

-     the long-term forecast profit profile of certain of the major widebody engine programmes which is typically between 30 and 55 years from initial investment to retirement of the fleet, including the aftermarket revenues earned from airline customers; and

-     the long-term forecast profit and cost profile of the other parts of the Group's UK business.

The assessment takes into account UK tax laws that, in broad terms, restrict the offset of the carried forward tax losses to 50% of current year profits. Based on this assessment, the Group has recognised a deferred tax asset of £1,010m relating to losses and £163m relating to ACT. This reflects the Group's conclusions that:

-     It is probable that the UK business will generate taxable income and tax liabilities in the future against which these losses and the ACT

can be utilised;

-     Based on current forecasts and using various scenarios these losses and the ACT will be used in full within the next 20 to 30 years

which is within the expected widebody engine programme lifecycles.

A deferred tax asset of £438m has not been recognised. This is based management's assumptions relating to the amounts and timing of future taxable profits and takes into account that higher losses were incurred in 2019 than expected primarily due to the recognition of a £1.4bn exceptional charge in respect of the Trent 1000.

Changes in future profits will impact the recoverability of the deferred tax assets, the key assumptions impact contract margins. A 5% charge in such margins would result in around a £2bn change in UK profits over the remaining life of the programmes against which the recovery of the tax losses and ACT would be assessed. Such a variance could result in a change of up to £170m in the related deferred tax balances recorded on the Group balance sheet, assuming a 17% tax rate and the 50% loss offset restriction mentioned above.

The Group has also reassessed the recovery of other deferred tax assets, including those arising on unrealised losses on derivative contracts. Whilst the deferred tax asset has reduced anyway as a result of the reduction in the unrealised losses in 2019, the Group has also derecognised £86m in line with the approach outlined above. The impact of this is non-underlying.

 

5   Taxation continued

Any future changes in tax law or the structure of the Group could have a significant effect on the use of losses and ACT, including the period over which they can be used. In view of this and the significant judgement involved the Board continuously reassess this area.

The Budget 2016 announced that the UK tax rate will reduce to 17% with effect from 1 April 2020. The rate reduction to 17% has been

substantively enacted on 6 September 2016. The deferred tax assets and liabilities of UK companies within the Group have therefore been

calculated at 17%.

The temporary differences associated with investments in subsidiaries, joint ventures and associates, for which a deferred tax liability has not been recognised, aggregate to £108m (2018: £99m). No deferred tax liability has been recognised on the potential withholding tax due on the remittance of undistributed profits as the Group is able to control the timing of such remittances and it is probable that consent will not be given in the foreseeable future.

 

6   Earnings per ordinary share

Basic earnings per ordinary share (EPS) is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares held under trust, which have been treated as if they had been cancelled. 

Diluted EPS is calculated by adjusting the weighted average number of ordinary shares in issue during the year for the bonus element of share options.

 

2019

 

2018

 

Basic

Potentially dilutive share options 1

Diluted

 

Basic

Potentially dilutive share options 1

Diluted

Loss attributable to ordinary shareholders (£m)

(1,315)

 

(1,315)

 

(2,401)

 

(2,401)

Weighted average number of ordinary shares (millions)

1,904

-

1,904

 

1,859

-

1,859

EPS (pence)

(69.07p)

(69.07p)

 

(129.15)p

-

(129.15)p

1 As there is a loss, the effect of potentially dilutive ordinary shares is anti-dilutive.

The reconciliation between underlying EPS and basic EPS is as follows:

 

2019

 

2018

 

Pence

£m

 

Pence

£m

Underlying EPS / underlying profit attributable to ordinary shareholders

15.86

302

 

15.98

297

Total underlying adjustments to loss before tax (note 2)

(77.42)

(1,474)

 

(183.59)

(3,413)

Related tax effects

(7.51)

(143)

 

38.46

715

EPS/loss attributable to ordinary shareholders

(69.07)

(1,315)

 

(129.15)

(2,401)

Diluted underlying EPS

15.86

 

 

15.98

 

 

7   Payments to shareholders in respect of the year

Payments to shareholders in respect of the year represent the value of C Shares to be issued in respect of the results for the year.  Issues of C Shares were declared as follows:

 

 

2019

 

2018

 

 

Pence per
share

£m

 

Pence per
share

£m

Interim (issued in January)

 

4.60

87

 

4.60

86

Final (issued in July)

 

7.10

137

 

7.10

135

 

 

11.70

224

 

11.70

221

 

8   Intangible assets

 

Goodwill

£m

Certification costs

£m

Development expenditure

£m

Customer relationships

£m

Software

£m

Other

£m

Total

£m

Cost

 

 

 

 

 

 

 

At 31 December 2018

1,087

948

2,883

1,384

964

811

8,077

Additions

-

15

481

-

101

43

640

Acquisition of businesses

11

-

-

-

4

23

38

Transferred to assets held for sale 1

(34)

-

(11)

(16)

(3)

(11)

(75)

Disposals

-

-

(8)

(1)

(111)

(19)

(139)

Reclassifications from PPE

-

-

17

-

19

(18)

18

Exchange differences

(40)

(1)

(68)

(64)

(7)

(26)

(206)

At 31 December 2019

1,024

962

3,294

1,303

967

803

8,353

 

 

 

 

 

 

 

 

Accumulated amortisation and impairment

 

 

 

 

 

 

 

At 31 December 2018

42

373

1,111

304

607

345

2,782

Charge for the year 2

-

19

113

72

88

26

318

Impairment

18

-

20

9

7

-

54

Transferred to assets held for sale 1

(34)

-

(11)

(16)

(3)

(11)

(75)

Disposals

-

-

(7)

(1)

(99)

(19)

(126)

Reclassifications from PPE

-

-

-

-

10

(1)

9

Exchange differences

4

-

(25)

(14)

(5)

(11)

(51)

At 31 December 2019

30

392

1,201

354

605